HSBC can benefit as China’s stimulus plans shift gears

When we first recommended HSBC (HSBA) back in the summer, it stood out as a high-quality banking play with exposure to key growth opportunities, a diversified revenue base, and a healthy dividend yield.

Revenue growth: HSBC reported $14.9 billion in Q3 revenue, up 6% compared to the same period last year, primarily driven by Asia’s sustained recovery and higher net interest income (NII). Asia contributed 64% of total group revenue, demonstrating how reliant HSBC remains on this high-growth region despite global market volatility.

Net interest income (NII), a key profitability driver, increased by 8% to $8.3 billion, aided by higher interest rates in key markets like the UK and Hong Kong and sustained loan demand.

Cost-to-income ratio: HSBC’s strategic cost initiatives, including digital transformation and operational streamlining, have paid off. The ratio improved to 50.5%, down from 52.3% in the previous quarter, reflecting improved operational efficiency.

The Q3 figures underscored that HSBC is not only weathering macroeconomic pressures but is actively implementing strategic growth initiatives.

Chinese stimulus: A new catalyst

The Chinese government’s recent announcement of “moderately loose” monetary policy represents a strategic shift from 14 years of monetary prudence, focusing on economic growth rather than strict oversight.

• Increased liquidity to support borrowing and infrastructure spending: The shift to looser monetary policy will improve liquidity levels, making it easier for businesses and consumers to access financing. This creates opportunities for HSBC to capitalise on higher demand for retail and corporate lending.
• Stabilisation of the property market: Monetary easing will likely provide headroom for investment and market confidence, which could stabilise the housing market and support demand for mortgages—one of HSBC’s key lending areas.
• Consumer spending recovery: Looser monetary conditions and government stimulus are expected to improve consumer confidence and spending. Retail lending, credit card spending, and personal loan demand could receive a significant boost, all of which align with HSBC’s strategic priorities in Asia.

HSBC has strategic exposure to this economic recovery. With 40% of its total group revenue tied to Greater China and Hong Kong, the bank is well-positioned to benefit from these stimulus-driven opportunities.

The infrastructure spending and fiscal stimulus efforts are expected to target transport networks, renewable energy, and technology upgrades, providing opportunities for HSBC’s core lending businesses while supporting longer-term economic recovery. These changes, combined with the loosening of monetary policy, suggest that now could represent a pivotal moment for HSBC to strengthen its strategic positioning.

A breakout with room to run

On the price chart, HSBC’s share price is showing high levels of relative strength…

Other key valuation indicators include:

• Dividend yield: HSBC offers a 5.3% dividend yield, which remains well above the average for global banking stocks. This demonstrates strong cash flow generation and an ability to return capital to shareholders even during volatile periods.
• Dividend cover ratio: At 1.8x, HSBC maintains sufficient cover to ensure dividends are sustainable, even during macroeconomic uncertainty.
• Profitability recovery: HSBC’s Return on Equity (ROE) stood at 10.5% in the latest quarter, demonstrating stable recovery as the bank continues to benefit from strategic cost initiatives and market opportunities.

These numbers suggest that the market is underestimating HSBC’s recovery potential. As investors with a longer-term perspective we believe we can take advantage of this relatively low valuation to strengthen our average position at an opportune entry point.