HBCYF - HSBC: Heavily Undervalued While It Continues To Outperform

2024-02-13 08:00:00 ET

Summary

• HSBC is growing fantastically, owing to elevated interest rates and commercial development, particularly in its Wealth business.
• Following considerable disposals and rationalizations, we believe the current state of HSBC is highly attractive. It is diversified through service lines and geography, with attractive margins.
• Whilst elevated rates cannot last, economic growth should improve as the former declines, flexing greater the development HSBC has made in its Commercial and Wealth segments.
• We expect distributions to remain strong in the coming years as its earnings stability improves.
• Despite these improvements, HSBC’s valuation continues to lag behind its peers, suggesting considerable upside in our view.

Investment thesis

Our current investment thesis is:

• HSBC is not the business it was a decade ago or even half-a-decade ago. Management has done well to incrementally improve the business, similarly to that observed with Barclays and Natwest. While there is still further improvement ahead, we believe it has reached the point of being a long-term hold within a diversified portfolio.
• The company perfectly supports the old and the new world, is diversified by business lines, and is too big to fail, doing all of this with market-leading capabilities and a renowned brand.
• We expect its near-term performance to continue to impress, while it gradually shifts toward Wealth and Commercial banking in the medium term. China and the UK do represent risks but the data does not suggest an issue thus far.
• HSBC has only recently reached a valuation of 1x its book value, while still trading at a considerable discount to its peers. This is an important landmark but more progress is ahead. We believe the UK Banking industry is in its best place since the GFC and it is only a matter of time before markets stop fearing the UK and realize this.

Company description

HSBC (HSBC) (HBCYF) is a British multinational bank, providing several financial services including, commercial banking, lending services, wealth management, and investment banking. HSBC operates across most of the world, earning the majority of its income from Asia (>50%, followed by Europe ~20%, MENA, North America, and LatAm)....

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