Down 12% to under £13, is this exactly the right time for me to buy more HSBC shares?
HSBC (LSE: HSBA) shares have fallen from record highs, widening the clear discount to the bankâs long-term earnings power, in my view.
It continues to deliver strong profitability, rising fee income, and higher capital returns. With momentum building across its core businesses, this valuation looks increasingly out of step with the fundamentals.
So how high could the stock go?
Strong earnings growth ahead
The key driver of any firmâs share price (and dividends) over the long run is earnings (âprofitsâ) growth. A risk to HSBC remains falling interest rates in its core markets, which could squeeze its profit margins.
Nevertheless, consensus analystsâ forecasts point to average annual earnings growth of 10.1% through to the endâof 2028. This suggeststhe bankâs profitability will keep rising, despite the current bearish interest rate backdrop.
This looks well-supported by its full-year 2025 results, released on 25 February. Adjusted profit before tax increased by $2.4bn (£1.78bn) year on year to $36.6bn. This was driven by strong performance in its Wealth division, especially in its International Wealth and Premier Banking businesses.
Adjusted return on tangible equity (ROTE) — a key profitability benchmark for banks — increased to 17.2%. This was 1.6 percentage points higher than in 2024, powered by fee growth in Wealth from its Investment Distribution and Insurance businesses.
Net interest income — the difference between money made on deposits and loans — was $34.8bn. This was $2.1bn higher than in 2024, reflecting the benefit of the bankâs interest rate hedging tools. This stabilises margins as global rates shift.
Management concluded by raising its ROTE target to 17%+ through to end-2028. The previous target was mid-teens for the three years through to end-2027.
Where should the shares trade?
To gauge the true worth of HSBCâs shares, I ran a discounted cash flow (DCF) analysis. This estimates the âfair valueâ of any firmâs stock by projecting its future cash flows and then discounting them back to today. This also reflects consensus analystsâ forecasts for its long-term growth.
Some DCF modelling is more bearish than mine, depending on the inputs used. However, based on my DCF assumptions â including an 8.4% discount rate â HSBC shares are 40% undervalued at their current £12.45 price.
That implies a fair value of £20.75 â close to double where the stock trades today.
This is crucial for long-term investorsâ profits because asset prices tend to converge to their fair value over time. Consequently, this suggests a potentially terrific buying opportunity to consider today if those DCF assumptions hold.
My investment view
HSBCâs improving profitability, rising fee income, and stronger capital returns make the current valuation look increasingly attractive to me.
The bank is delivering consistent earnings growth, lifting its longâterm return targets, and strengthening the parts of the business that drive sustainable value.
I intend to buy more shares myself, and I think the stock merits the attention of other investors who are looking for undervalued quality.
A bonus here is that analysts forecast its dividend yield will rise too in the coming years. Specifically, the estimates are for a 5.7% dividend yield by 2028, up from the current 4.5%. By contrast, the FTSE 100 average is just 3.1% now.
In the meantime, other deeply discounted high-yield shares have caught my eye too.
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HSBC Holdings is an advertising partner of Motley Fool Money. Simon Watkins has positions in HSBC Holdings. 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.
