The HSBC (LSE: HSBA) share price has had a good week following strong results from it and also from other banks. Over the last 12 months, the shares are up by around 11% and are now pretty much back at a 12-month high. The results this week showed that pre-tax profits rose 79% to $5.8bn.
Despite the strong rise seen already, I think the share price could continue to do well. Here are some reasons why.
What could drive HSBC share price higher?
There are four reasons making me think the share price could rise further. One catalyst would be the reintroduction of dividends. Currently, the board is considering a half-year dividend.
Also, pre-Covid, HSBC was planning some quite radical restructuring to achieve big cost savings. That was largely shelved because of the crisis, but could resume in earnest once economic conditions improve. Operating costs have actually risen 9% year-on-year so this won’t be easy, but the relatively new chief executive was promoted on the back of plans to restructure the Asia-focused bank.
Thirdly, investment banking is doing well. Turbulent financial markets have led to a spike in trading and hedging activity, which has been good for that source of revenue. The diversification across retail and investment banking is also the reason I happen to like Barclays as well. It means if one unit struggles, then the other can in theory pick up the slack.
Selling off businesses like the French and US operations could also help the HSBC share price. Slimming down through disposals like this has certainly given a boost to the Aviva share price. Such a strategy seems to have broad investor approval. I have reason to think a leaner, more focused, HSBC should also see its share price benefiting as investors should get a more profitable, even-more-Asian-focused bank. It’s a more compelling investment proposition.
Risks with HSBC
At least it’s compelling as long as HSBC does well in China. However, the big elephant in the room is HSBC’s relationship with the Chinese authorities. As seen with Alibaba‘s Jack Ma and his companies, when the authorities turn against a company, operating can become tricky.
On top of that, the situation in Hong Kong remains uncertain. Asia accounts for around 90% of HSBC’s profit, so these issues are very serious. They have also been going on for a while so may hold back investor sentiment and consequently the HSBC share price.
The other major risk that I see is that interest rates remain low for a long time. The result is that HSBC’s net interest margins (the difference between what the bank charges on loans and pays on deposits) is just 1.21%. That doesn’t leave too much room for error, which is why when bad debts increase, the bank (like others in its sector) tends to report a loss.
In the end though, on top of the possible catalysts outlined above, a combination of value shares doing well and economies bouncing back (particularly China) means that I’ll consider adding HSBC to my portfolio. I think the latest results could trigger a decent run for the HSBC share price.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Barclays and 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.