HSBC’s (LSE: HSBA) share price is down 11% from its 3 March 12-month traded high of £9.50.
This was driven by the 2 April announcement from the US of swingeing tariffs on its trading partners. Banks broadly reflect the economic fortunes of the countries in which they operate, so this was unsurprising.
However, even if current US President Donald Trump continues with this protectionist policy I do not think his successors will. Even if they do, I believe its trading partners will form new alliances to counteract these measures long term.
As a former investment bank trader and longtime private investor, I know that time is the ally of share profits. The longer an investor’s timeframe, the greater the chance that stocks have to rebound from any short-term price shocks.
The key to choosing the optimal shares to benefit is to look at fundamental value, in my experience.
Are the bank’s shares undervalued?
The first part of my assessment of any stock’s value is comparing its key measurements with those of its peers.
On the benchmark price-to-earnings ratio, HSBC’s 8.6 is undervalued against its competitors’ average of 9.3.
These comprise Barclays at 7.9, NatWest at 8.7, Standard Chartered at 9.4, and Lloyds at 11.1.
The second element of my evaluation is to ascertain where a firm’s share price should be based on its future cash flows.
Using other analysts’ figures and my own in a discounted cash flow valuation shows the shares are 51% undervalued at their current £8.45 price.
Therefore, the fair value for them is £17.24, although market whims might push them lower or higher than that.
A risk also remains from any sustained fall in interest rates in its key markets as this would decrease its net interest income. This is the difference in income it makes from loans given out and deposits taken in.
What’s the dividend yield?
Aside from the prospect of making money on a share price gain, I believe HSBC will keep paying out high dividends.
In 2024 it paid 87 cents (65p equivalent), which gives a 7.7% yield on the current share price. That said, 16p of this was a special dividend, which may or may not be repeated.
By comparison, the current average yield for the FTSE 100 is 3.6%.
Consensus analysts’ forecasts are that the bank will pay dividends of 49p this year, 52.4p next year and 57p in 2027.
These would give respective yields of 5.8%, 6.2%, and 6.8%, with no special payments included.
Will I buy the shares?
A key positive for me in the current interest rate climate is that HSBC is shifting from an interest-based income model to a fee-based one.
Indeed, a third of its 2024 profits came from fee-based wealth and personal banking, with the proportion expected to rise this year.
Overall, its 2024 results saw profit before tax rise 6.5% year on year to $32.309bn. This was higher than consensus analysts’ forecasts of $31.67bn.
I already own shares in HSBC because of their extreme undervaluation in my view and their high dividend yield. Nothing has changed for me here, so I will buy more very soon.
