Interactive Investor

Why HSBC shares are worth 46% more than current price

7th March 2023 15:12

by Graeme Evans from interactive investor

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They've been one of the most popular UK bank stocks this year, but one analyst thinks there's much more to come. 

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The promise of bumper dividends and buybacks continues to fire up interest in HSBC Holdings (LSE:HSBA) as a leading City firm today forecast 46% upside for the shares to 900p.

Analysts at Jefferies believe that the Asia-focused lender has the potential to return up to 40% of its current market capitalisation in the period up to 2025.

The upgrade comes two months after the US bank declared London-listed HSBC as one of its top picks in the European banking sector, with a price target of 770p.

Since that note, HSBC has published annual results in which it pleased the City by revealing that it will consider a new cycle of share buybacks alongside May’s first quarter results.

The bank will also revert to paying quarterly dividends, part of wider plans for a payout ratio of 50% of reported earnings per share for 2023 and 2024.

In addition, the sale of HSBC’s Canada business to RBC is due to complete later this year and  result in a special dividend of $0.21 a share for payment in the early part of 2024.

Shares have risen more than 15% this year, with this afternoon’s level of 625p close to the highest point since 2019 as investors also eye exposure to a potential Chinese economic post-pandemic recovery.

In today’s note headed “a short runway to a long flight of buybacks”, Jefferies said its expectations for total capital returns in 2023-25 were 41% ahead of consensus.

This is based on first quarter results on 2 May including a $2.5 billion buyback in order to bring the bank’s capital buffer towards the midpoint of HSBC’s 14%-14.5% target range.

A further $2.5 billion is expected at the half-year stage before $5 billion at the year-end. Having just seen HSBC declare a dividend of 32 cents equating to a 2022 pay-out ratio of 44%, Jefferies is looking for a total of 79 cents in 2023 to leave the shares on a yield of 10.6%.

Its projections for earnings in 2023 and 2024 have increased by 4% and 6% respectively, driven by a revenue boost from trading related non-interest income. The firm’s new earnings forecasts now average 17% above the City’s 2023-25 consensus.

In its January note, Jefferies called HSBC “catalyst rich” due to the relaxation of Covid restrictions in China and Hong Kong where 36% of group assets are located.

It said: “We expect a re-opened economy to drive higher loan demand and general activity which should benefit HSBC. Hong Kong and mainland China have modestly higher net interest margins for the group, so a pick-up in loan growth in these regions should be accretive.”

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