Over a one-year period, the HSBC (LSE:HSBA) share price is up 30%. This is a good return, considering that over the same period the FTSE 100 index has. gained 28%. However, over other periods it has offered less attractive returns. In fact, at 431p, the shares are still a fair way below the 500p+ levels seen in early 2020 before the pandemic. So what’s going on here?
Positive developments seen
In October, the HSBC share price jumped 13%, making it one of the best performing stocks in the FTSE 100. One of the main drivers behind this was the Q3 results that were released. Pre-tax profits were $5.4bn for the quarter, up 75% on the same period last year. This figure was also far beyond analysts’ expectations, which were set around $3.77bn.
Even though revenue was broadly flat, part of the boost came from a reduction in provisions needed for Covid-19-related costs. HSBC released $700m from this pot, which naturally acted as an uplift for profitability. Even the fact that the bank felt comfortable taking this action was a positive sign for investors. I think that was one reason for the jump in the HSBC share price in October.
The results were positive, but I still think there are reasons for caution. The primary way that banks make money is via net interest income. This income is generated from the margin made between the rate charged on lending versus the interest paid on deposits. In Q2 the margin was 1.2%, in Q3 it was 1.19%. Not a huge fall, but it continues to show a decline of the margin in recent times.
Risks and rewards with the HSBC share price
I think that the share price can continue to move higher as we look towards 2022. Fundamentally, the business is in a good place. However, I think some big issues will come from external factors.
For example, the continued presence of Covid-19. We’ve already seen how it hit the banks last year, with spending activity falling and provisions needed for bad loan defaults. If we have a tough winter, or another variant pops up, HSBC would be vulnerable.
Another external factor is global interest rates. The Bank of England surprised markets by not raising interest rates last week. In the US, it looks like rates won’t be heading higher until autumn next year. So regarding the net interest margin, I can’t see it improving any time soon. This could be a drag on future results, as well as on the share price.
What the bank can do is focus on things that it can control. After cutting operations in France and the US, it’s making a large push towards Asia. It clearly thinks that this market is worth the investment and can yield rich rewards. If this strategic move is correct, then I think there’s large growth potential for the share price.
Overall, HSBC shares have momentum over the past month. I think that provided external risks don’t blow up soon, I’d consider investing money in HSBC.
jonathansmith1 has no position in any share mentioned. 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.
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