HSBC (LSE:HSBA) recently reported its much anticipated annual results for 2020. Many investors were keen to see how the bank did during the challenging pandemic and whether management would pay a dividend again given the improved economic conditions. I think it’s fair to say the bank answered some of those questions. With the results, here are some key points and what I’d do given the current HSBC share price.
Annual 2020 result
Like many other banks, HSBC’s 2020 results weren’t that great due to the pandemic. For the year, HSBC reported a profit before tax of $8.78bn, beating the analyst estimates of $8.33bn, but still lower by 34% year-over-year. Sales also fell 10% to $50.43bn.
Due to the pandemic, the bank suffered from increased credit losses. Given that many central banks cut rates in response to the pandemic, HSBC also made less in some interest rate sensitive areas of the bank. In contrast to their pre-pandemic goal, management also no longer expects to achieve a return on average tangible equity (RoTE) of 10%-12% in 2022. Instead, the company “will now target a RoTE of greater than or equal to 10% in the medium term”.
Nevertheless, it’s not all bad news as vaccine rollouts around the world have begun to decrease the number of new Covid-19 cases substantially. Given that the worst seems to be over (at least currently) thanks to the vaccines, British regulators have allowed big banks to pay dividends again if their circumstances are up for it.
In terms of its circumstances, HSBC’s board has decided to pay a 15 cent interim dividend for 2020 and will consider another interim payout at the bank’s half-year result report in August. The bank is not paying quarterly dividends for 2021, however, and the board will target a payout ratio of 40%-55% for reported earnings per share (EPS) for 2022 onward. Management will also consider share buybacks over time, but not in the near term.
The bank is also planning to invest more into Asia. Management disclosed that they are planning to spend around $6bn over the next five years, increasing the bank’s business in the region, with a particular focus on wealth management.
The HSBC share price: what I’d do
In terms of what I’d do given the current HSBC share price, I’d buy and hold the stock.
Although management targeting less ambitious returns on average tangible equity isn’t good news, I still think HSBC is a ‘value play’ given its quality of business and its price-to-book ratio of around 0.64.
With the vaccine rollouts and the potential Biden stimulus, I reckon the world economy will grow in the next few years and interest rates could begin to normalise as a result as well. If interest rates begin to normalise, I think management could have an easier time growing profits even if not as ambitious as before. Longer term, I like management’s pivot towards Asia as I think the region could offer more opportunities for profit growth as well.
With this said, HSBC will likely face stronger competition in the future given the continued development in fintech. If HSBC management makes a bad major acquisition, Covid-19 variants cause economic growth to underwhelm, or the bank’s results miss market expectations, the HSBC share price could decline.