On Monday (30 October), HSBC (LSE:HSBA) shares remained flat despite an earnings miss. That’s because the bank also announced a $3bn share buyback.
Nonetheless, if I’d invested in HSBC shares a year ago, I’d have seen a 33.5% rise in the value of my shares during that period. Plus a rather attractive 4% dividend.
As such, a £10,000 investment a year ago would be worth around £13,750 — including the dividend. That’s a very impressive return.
So is HSBC still worth investing in?
Q3 earnings
In the three months to 30 September, HSBC’s pre-tax profit increased to $7.7bn, up from $3.2bn in the corresponding period of 2022. However, pre-tax profit fell short of the consensus estimate of $8.1bn.
HSBC also reported expected credit losses and other credit impairment charges of $1.1bn, which were largely consistent with the figures from the same period in the prior year. This included $500m in connection to China’s failing commercial real estate sector.
Revenue increased 40% to $16.2bn, mainly due to higher net interest income. However, it’s worth noting that the increasingly Asia-focused bank has a lower net interest margin — 1.7% — than its UK peers.
Keeping an eye on China
In the Q3 results, HSBC said it “would continue to monitor risks related to [its] exposures in mainland China’s commercial real estate sector closely“.
While issues in China, notably the failure of several of the country’s largest property developers, will likely put many investors off — I have seen some articles suggesting HSBC is uninvestible — the bank has limited exposure to commercial real estate.
Its exposure represents less than 2% of its total loans. In turn, we can see that the Asia-focused bank does have some insulation against the real estate sector in China.
However, it’s true that China’s reopening has been less dynamic than many had expected. Moreover, it’s hard to see how a collapsing real estate sector could be truly contained.
Some estimates suggest that the property industry accounts for around 30% of the country’s GDP. Naturally, China disputes this figure, suggesting the real number in closer to 5%.
Worth the risk?
The firm’s valuation has become more appealing, due to downward pressure since the late summer.
Currently, HSBC is trading at a multiple of 6.1 times earnings, inferring a substantial discount compared to the global industry average of 9.1 times.
Looking at forward multiples, we can see that HSBC still trades at a discount — at 5.4 times forward earnings versus the industry average of 8.8 times.
These are certainly attractive multiples, and the Relative Strength Index also confirms that with a current rating of 29 — a figure under 30 normally suggests oversold conditions.
So is it worth it? Personally, I wouldn’t be surprised if we saw more downward pressure before things improve in the medium term. It may be worth the risk in the long run, but right now, the market’s very reactive to commentary on China.
