By midday today (9 October), the HSBC (LSE:HSBA) share price was approximately 5% lower after the FTSE 100’s second-largest company announced plans to buy out the minority shareholders in Hang Seng Bank. It already owns 63.5% of the financial institution, which is listed on the Hong Kong Stock Exchange.
Not cheap
HSBC is offering to pay 30% more than the pre-announcement share price. This means the deal’s likely to cost $13.6bn. To help pay for this, it’s going to suspend its share repurchases for the next three quarters.
The purchase price definitely appears expensive to me. It’s equivalent to 1.8 times the book value of Hang Seng Bank. For comparison, HSBC currently has a price-to-book ratio of one.
And judging by today’s market reaction, investors are concerned. Andrew Coombs, one of Citi’s analysts, wrote: “While [the] strategic rationale is compelling, and this seems a sensible overall use of capital, we expect investors will query why now and at this price.”
The fall in HSBC’s market cap is pretty much the same as the cost of the deal. It’s as though investors have placed no value on the minority stake that it’s looking to buy. This seems a little silly to me.
However, seasoned investors know that short-term price movements should be ignored especially when – as is the case here — nothing has fundamentally changed with the underlying business.
A possible opportunity
But now could be a good time to take advantage and consider taking a stake in a quality company that’s 5% cheaper than it was yesterday.
Prior to today, according to the London Stock Exchange, HSBC had the fourth-lowest price-to-earnings ratio of the FTSE 100’s five banks.
And the highest yield. Of course, there are no guarantees this will continue. But the bank has a stated ambition of returning 50% of earnings per share (EPS) to shareholders by way of dividends each year.
A closer look at financial strength of HSBC shows that the Hang Seng Bank deal is pretty inconsequential. At 30 June, the group had $1.7trn of customer deposits on its balance sheet and $982bn of loans. And during the first six months of 2025 (H1 25), it reported a profit after tax of $12.4bn.
Pros and cons
But there are a few things to keep an eye on. During H1 2025, its net interest margin was 1.57% compared to 1.62% for the same period in 2024. Diluted EPS was also lower.
Banks act as a barometer for the health of the wider economy. Any sign of a significant global slowdown and I’m sure HSBC’s share price will suffer. But with operations in 57 markets it has a truly global reach, which should give it some protection from isolated country-specific problems.
According to McKinsey & Company, the world’s banks generate a return on tangible equity (RoTE) of 11.7%. But HSBC does better than this. In 2024, its RoTE was 14.6% (16% excluding notable items). And it’s targeting a “mid-teens” return in 2025-2027. This performance is underpinned by an ongoing efficiency drive that’s expected to yield annualised cost savings of $1.5bn by 2026.
On this basis, I reckon investors could think about taking advantage of today’s share price pullback and consider adding the stock to their long-term portfolios.
