The past year has been tough for large banks. The impact of the pandemic has been widely felt with large provisions needed to be set aside to cover potential bad loans. With credit drying up and interest rates being cut to low levels, performance for 2020 was underwhelming. HSBC (LSE:HSBA) fell into this category. But thanks to strong Q1 earnings out today, could it be the catalyst for an HSBC share price rally?
Looking over the results
Q1 2021 results showed a rise of 84% in profit after tax versus the same period last year. Although this looks slightly inflated due to Q1 2020 including the beginning of the pandemic, it’s still a very good performance. As a result, the HSBC share price is up around 2.5% so far today.
CEO Noel Quinn said he’s “pleased with our revenue and cost performance, but particularly with our significantly lower expected credit losses“. That reduction in expected credit losses is a positive for the HSBC share price. In Q1, $0.4bn was released from this area. It shows better sentiment that credit losses could be smaller than anticipated. We aren’t completely out of the woods yet, but I think there’s a strong chance of a further reduction this year.
An element that I think bodes well for Q2 and beyond was the performance of the UK arm. HSBC UK generated $1bn out of the $5.8bn globally of pre-tax profits. Given the size of the global bank, this is impressive. I’m of the opinion that the UK economy is poised like a coiled spring to pop in the summer and beyond. So I think that the UK bank should generate high returns for the overall group. This could help to pull the HSBC share price higher with it.
My HSBC share price outlook
One risk in the latest report was a confirmation that the net interest margin has shrunk by 0.33% to 1.21%. This margin measures the difference between what the bank pays out in deposits versus what it makes via lending. Due to reduced interest rates, lending rates have fallen, but so have deposit rates. Ultimately, it squeezes the margin the bank makes in the middle, shown by the latest figures from HSBC. I expect this to continue this year, which could really start to hamper profits.
On balance, I do think the HSBC share price could rally higher from here. Over a one-year period, the shares are only up 5%, lagging other FTSE 100 companies. Obviously the reasons I mentioned at the beginning are why this has been the case. But if we continue to see strong earnings in Q2 and beyond, then I think there’s a strong case for HSBC shares to make stronger gains.
As a long-term value investor, I want to buy ahead of this potential move, so am considering buying HSBC shares at the moment.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.