We Will Streamline Banking Operations For Long Term Stability

Key Takeaways

• Strategic investments in Wealth and Transaction Banking drive strong revenue momentum and sustained growth, positively impacting medium-term revenue growth.
  
• Organizational simplification and robust financial strategy, including share buybacks, enhance earnings, net margins, and shareholder value.
  
• Economic uncertainties and increased tariffs could impact HSBC's revenue and margins, while restructuring costs and currency fluctuations pose risks to profitability and investor confidence.

Catalysts

Engages in the provision of banking and financial products and services worldwide.

• HSBC continues to make significant strides in its Wealth and Transaction Banking divisions, contributing to strong revenue momentum. With ongoing investments in Wealth products and distribution channels, HSBC expects sustained double-digit growth, positively impacting revenue growth in the medium term.
  
• The strategic focus on organizational simplification and cost reallocation initiatives aims to deliver major cost efficiencies, expected to result in improved net margins. The bank is on track to achieve approximately $1.5 billion in gross cost saves, enhancing earnings.
  
• HSBC's robust balance sheet, characterized by significant deposit surpluses and a strong capital position, underpins the bank's recurring income and financial stability. This strong financial foundation enables HSBC to maintain and grow its net interest income, supporting earnings stability.
  
• A newly announced $3 billion share buyback and dividend payout exemplify HSBC's commitment to returning capital to shareholders. This not only supports share price appreciation but also enhances earnings per share (EPS) growth.
  
• HSBC's ability to navigate adverse economic scenarios, such as potential tariff increases, with minimal revenue impact, underscores its resilience and operational agility. Its diversified trade finance and transaction banking businesses buffer against global trade fluctuations, suggesting stable future revenue streams.

HSBC Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HSBC Holdings's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 33.9% today to 35.1% in 3 years time.
• Analysts expect earnings to reach $24.4 billion (and earnings per share of $1.57) by about May 2028, up from $19.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Banks industry at 8.0x.
• Analysts expect the number of shares outstanding to decline by 4.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.12%, as per the Simply Wall St company report.

HSBC Holdings Future Earnings Per Share Growth

Risks

• The external macroeconomic environment is described as less favorable and more uncertain, particularly due to uncertainties around trade policy which may dampen business confidence and constrain investment, potentially impacting HSBC's future revenues and net margins.
  
• There is potential for a slowdown in global trade and GDP growth due to higher tariffs, which could lead to a low single-digit percentage impact on the group's revenues. This scenario is a risk that contradicts the growth potential of the share price.
  
• The consensus downside scenarios estimate an incremental expected credit loss (ECL) charge of around $0.5 billion due to increased tariffs, which could impact overall earnings and net margins.
  
• HSBC's cost management and restructuring plans, while on track, involve significant projected expenses, including up to $1.8 billion in restructuring costs. This may impact short-term profitability and net earnings until savings materialize.
  
• Currency fluctuations, such as a stronger dollar, could pressure cost and revenue projections, impacting HSBC's ability to meet its financial targets, which may affect investor confidence and share price growth.

Valuation

• The analysts have a consensus price target of £9.23 for HSBC Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £11.95, and the most bearish reporting a price target of just £8.01.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $69.7 billion, earnings will come to $24.4 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of £8.32, the analyst price target of £9.23 is 9.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.