One stock that’s been popular with retail investors lately is FTSE 100 banking giant HSBC (LSE: HSBA). Last week, HSBC was the second most purchased stock on Hargreaves Lansdown.
Should I buy its shares for my own portfolio? Let’s take a look at the investment case.
HSBC shares: the bull case
I can see why investors like HSBC shares right now. For starters, business conditions for banks are improving rapidly now that the global economy is rebounding from Covid-19.
This is illustrated in HSBC’s recent Q1 2021 results. For the period, the bank reported expected credit losses and other credit impairment charges (ECL) of negative $0.4bn (no losses) compared with a charge of $3bn in the same period last year. The group said it expects the full-year ECL charges for 2021 to be “materially lower” than in 2020, due to the improved economic outlook.
Meanwhile, HSBC’s reported profit before tax was up 79% to $5.8bn for the period. During the quarter, all regions were profitable. “The economic outlook has improved, giving us increasing confidence in our revenue growth plans,” it said.
Secondly, we are seeing a lot of money flow into ‘cyclical’ areas of the stock market, such as financial stocks, now that the economy is in recovery mode. This can be seen in HSBC’s share price. Since 9 November, when Pzifer announced it had developed a Covid-19 vaccine, the bank’s share price has climbed from around 340p to 450p. This trend probably has a way to go. In the near term, I think HSBC’s share price could continue to rise.
These factors could hurt HSBC’s share price
But I do have some reservations about HSBC shares. One is that, while we’re likely to see interest rates rise at some point in the not-too-distant future, I think rates will remain low on a relative basis.
This is likely to impact HSBC’s profitability, as banks generate a large proportion of their income from the spread between borrowing and lending rates (which is compressed when rates are lower). This spread is known as the ‘net interest margin’ (NIM). In Q1, HSBC reported a NIM of 1.21%, down 33 basis points from Q1 2020.
Secondly, there’s dividend uncertainty here. In its latest quarterly results, HSBC didn’t declare a dividend (despite the fact it declared a small one in February for 2020).
In relation to the dividend, HSBC said: “We do not intend to pay quarterly dividends during 2021. The group will consider whether to announce an interim dividend at our 2021 half-year results in August.” Future dividends are likely to depend on the Bank of England’s dividend policy.
Finally, the threat of financial technology (FinTech) remains a valid concern, to my mind. Right now, the FinTech industry is advancing at a rapid rate and capturing banking market share. Given the progress these companies are making, I believe that banking is likely to look very different in a decade’s time.
HSBA shares: should I buy?
Weighing everything up, HSBC shares aren’t a buy for me. The share price could rise near-term, but I’m concerned about growth in the long run. All things considered, I think there are better shares I could buy.
