With the much anticipated return of a dividend (albeit only 15 cents per share for the interim period) failing to ignite the HSBC (LSE:HSBA) share price, the bank still trades for below book value. As of late February, HSBC shares trade for a price-to-book ratio of around 0.63. Here is one potential event I think that could send shares higher.
The importance of interest rates to HSBC
Due to the pandemic, central banks around the world have lowered interest rates to ultra-low levels. This has acted as a headwind for the bank. According to CEO Noel Quinn, HSBC “lost around $5.3 billion of net interest income” due to the lower rates. That has translated into an over 2 percentage point decrease in the bank’s return on tangible equity (RoTE).
The low rate environment is one of the reasons why management has focused more on the bank’s non-interest income business aspects. The environment is probably a key reason why management has a less ambitious goal of targeting “a RoTE of greater than or equal to 10% in the medium term” rather than their previous pre-pandemic goal of achieving a RoTE of 10%-12% next year. In terms of management’s expectations, they “don’t expect rates to rebound anytime soon” either.
Given the importance of interest rates to the bank, I’d follow the announcements of the US Federal Reserve. If there are any hints of faster-than-expected interest rate normalisation coming out the Fed, I think that could send the HSBC share price higher. HSBC’s fortunes are affected by the Fed because the bank makes a lot of money from Hong Kong. Although it is a part of Greater China, Hong Kong’s monetary policy is affected by US interest rates due to its dollar peg.
The HSBC share price: what I’d do
Although the Fed has indicated that it presently favours lower interest rates, I’d nevertheless buy and hold HSBC stock given the current HSBC share price.
I think there is a chance that interest rates could rise faster than expected in the medium term. Given the amount of stimulus that governments and central banks have enacted, inflation could be a potential problem in certain areas perhaps sooner than expected. If inflation were to be a problem, I reckon interest rates could potentially normalise faster.
I also think HSBC’s dividend could increase in the future given management’s goal of paying 40%-55% for reported earnings per share (EPS) as a dividend for 2022 onward. Given that incomes in Asia will likely continue to increase as the region develops, I think management growing profits isn’t that difficult.
With this said, management will need to make the right decisions. The bank hasn’t done well due to poor mergers and acquisitions in the past. It might not do well in the future if management makes bad deals or if the company fails to deliver the results the market expects. If interest rates stay low for longer than expected, management will likely have more work to do to meet estimates.
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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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