HSBC (LSE: HSBA) shares have staged a bit of a recovery recently. Since falling to near-280p in the third quarter of 2020, HSBC’s share price has bounced back to around 430p, as sentiment towards ‘cyclical’ stocks has improved. That represents a gain of more than 50%. Over the last 12 months however, HSBC shares are still down about 14%.
Should I buy the FTSE 100 company for my own portfolio? Let’s take a look at the investment case.
Can HSBC’s share price keep rising?
In the short term, a few things could push HSBC’s share price higher, in my view. The first is better economic conditions. 2020 was a terrible year for the global economy and this impacted banks significantly. HSBC, for example, reported expected credit losses and other credit impairment charges (ECL) of $8.8bn for the year, up $6.1bn on the prior year. In 2021, economic conditions should be much healthier. This should benefit HSBC.
The second is higher interest rates. This is good for banks like HSBC because much of their income is earned from the spread between the rates they charge to lend money and the rates they pay to borrow money. The higher interest rates are, the more opportunity there is to profit. There’s no guarantee interest rates are going to go up any soon. However, the recent rise in bond yields suggests plenty of investors do expect rates to rise sooner or later.
Finally, there’s the dividend. In 2020, HSBC was forced to suspend its dividend. Recently however, it announced it’s set to start paying dividends again. This could increase appeal for the stock among income investors, pushing the share price higher.
HSBC shares: my concerns
Having said all of that, I do have some concerns in relation to HSBC shares. The first is that, while we could potentially see interest rates rise a little in the short term, they’re likely to remain low for a while. This could impact HSBC’s profitability. It’s worth noting that recently, HSBC advised it no longer expects to reach its return on average tangible equity (RoTE) target of between 10% and 12% in 2022, as originally planned. It will now target a RoTE of greater than, or equal to, 10% in the medium term.
My second concern is in relation to the threat that financial technology (FinTech) poses. Financial services is an industry that could see huge levels of disruption in the decade ahead. Is HSBC resilient enough to thrive in an environment of digital banks, payments firms, and innovative lending companies? I’m not sure at this stage.
Finally, I’ve concerns about HSBC’s new dividend policy. In its recent full-year results, HSBC advised that it intends to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards. This means dividends could be more inconsistent, payout-wise, in the future. It’s worth noting that City analysts currently expect a payout of $0.29 per share for FY2022. That’s about 43% lower than the dividend paid for FY2018.
HSBC: my view
Weighing everything up, I’m not convinced HSBC shares are a great fit for my portfolio. I do think they have the potential to keep rising in the near term. However, HSBC appears to be facing a number of challenges in the long run.
All things considered, I think there are better stocks I could buy.