HSBC shares soar as profit falls! What’s going on here?

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HSBC (LSE:HSBA) shares rose more than 6% in early morning trading on Monday as Europe’s biggest bank topped estimates in its first-half report. However, profit dipped 15% year-on-year.

So, let’s take a closer look at the earnings report and whether this stock is right for my portfolio.

Strong earnings

On Monday, HSBC said that pre-tax profit came in at $9.2bn for the six months ending June 30, down from $10.84bn a year ago. However, profit beat the $8.15bn average estimate of analysts compiled by the bank.

The lender raised its near-term return on tangible equity goal to at least 12% from 2023 onwards, representing a fairly bullish outlook despite an uncertain macroeconomic environment. The earlier forecast had been for a 10% minimum.

The increasingly Asia-focused bank pointed to higher interest rates as a determinant of higher profitability. Annual net interest income is expected to reach at least $31bn this year and $37bn in 2023 as interest rates rise globally.

HSBC also committed restoring its dividend to pre-Covid levels.

China issues

HSBC has been pushing back against a proposal by top shareholder Ping An Insurance Group Co of China to split the bank. The Chinese insurer sees the spin-off as a way to unlock shareholder value amid tensions between China and the West.

However, HSBC’s fairly bullish outlook and dividend rise will likely reduce demand for the split.

CFO Ewen Stevenson said on Monday that Ping An is still pushing for structural reform, but claimed the bank saw no value in a split.

HSBC’s exposure to commercial real estate in China is also among its biggest challenges. A third of its $12bn China property exposure is “impaired” or “substandard“.

Management will meet investors in Hong Kong tomorrow for the first time in three years, and will undoubtedly face questions about the suggested split.

Would I buy HSBC shares?

HSBC trades with a higher price-to-earnings (P/E) ratio than the second and third-largest UK banks (Lloyds and Barclays). The lender has a P/E ratio of 10, more than double that of Barclays.

This higher P/E likely represents HSBC’s relative global reach and its exposure to higher-growth markets such as China and the wider Asian region. In 2021, the bank’s Asia operations accounted for 64.8% of pre-tax profits. Europe only accounted for 20%. 

So, I already own HSBC shares, but would I buy more at the current price? Probably not, as I see Barclays and Lloyds as stronger investment propositions. That’s not to say I wouldn’t buy more HSBC shares, it’s just a realisation that with limited funds, I have to pick my favourites.

I also have some concerns about the bank’s exposure to China and possible fallout from any economic issues there. That said, I’ve been expecting the China’s property bubble to pop for over a year now. Perhaps Beijing has it under control.

The post HSBC shares soar as profit falls! What’s going on here? appeared first on The Motley Fool UK.

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James Fox owns shares in Lloyds, HSBC and Barclays. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.