HSBC (LSE:HSBA) shares pushed higher this week after the company announced surging profits for the last quarter. The Asia-focused bank reported pre-tax earnings of $5.2bn. That’s a huge increase from $2.7bn, and ahead of the $4.96bn company-compiled average.
So let’s take a closer look at this FTSE 100 stalwart. Would it have been a good buy three years ago, and where will it go next?
Average returns
Over three years, HSBC is up 15%. So that’s 5% a year annualised return. That’s not bad at all, but it’s nothing to write home about.
So if I had invested £200 in HSBC shares three years ago, today I’d have £230 of shares, plus dividends. The dividend would have been worth around a further £25.
All in all, I wouldn’t be too unhappy about this return. After all, I’m not a greedy investor and HSBC does offer some degree of safety through its diverse geographies and broad range of activities.
Performance improves
The majority of these share price gains have come in the past three months — the stock is up 33%. That’s really a huge gain for a company that’s worth £126bn.
So what’s behind these share price gains? Well, to start with, we can observe improving macroeconomic indicators and positive events for HSBC.
One of these was China’s reopening after years of strict Covid restrictions. The Chinese economy is set to grow by 5.2% in 2023, and that’s positive for cyclical stocks — these are companies that tend to perform in line with the economy.
We can also observe an improving macroeconomic environment in Europe. The UK’s forecast recession looks like it will be shallower than originally anticipated, despite the high interest rate environment.
The recent rally was extended after a well-received earnings report earlier this week. HSBC said quarterly profits almost doubled, driven by the rise in global interest rates.
However, full-year profit fell to $17.5bn from $18.9bn. This was largely down to a $2.4bn charge on the sale of its retail banking operations in France.
HSBC is also in the process of selling its Canadian business. The bank said it intended to use the proceeds to reward its shareholders once the deal is completed. Shares pushed upwards on this news.
What am I doing?
Well, I’m already a shareholder in HSBC, but I’ll buy more stock when I have the funds available. Although I’m generally concerned that bull runs can quickly turn around when investor sentiment changes.
Broadly speaking, I see banks as an attractive place to invest right now. Valuations are low — HSBC trades with a price-to-earnings of 10 — net interest margins are strong, and yields are above the index average.
It also seems likely that central bank rates will remain higher for longer with inflation proving sticky and economies proving more resilient to higher borrowing costs.
