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№ 004 22 filings · 2024-07-31 → 2026-05-08

HSBC HOLDINGS PLC

HSBA
Banks Market cap £231,806m
Fair value range 1,050–1,450p Mid case · £214,795m
Absolute upside -7.3% vs current market cap
Conviction 4/5 confidence in fair call
Supports the call
  • Clean, granular IFRS disclosure with detailed ECL and notable-item bridges
  • Multiple valuation methods (P/TBV, P/E, dividend yield) converge on a tight range
  • Bank valuation methodology is unambiguous and well-established
Limits the call
  • Terminal RoTE assumption (13% vs 17%) materially swings fair value
  • BoCom carrying value far above fair value introduces discrete impairment risk
Methodology

Blended P/TBV (Gordon growth) and P/E, cross-checked with dividend yield

In one line · bull case

Reshaped, Asia-tilted international bank delivering sustainable mid-teens RoTE and large recurring capital returns, but trading near the top of fair value.

In one line · biggest risk

Further BoCom impairment and continued Hong Kong/mainland China commercial real estate ECL charges could compress earnings and the RoTE trajectory.

Drivers
AI exposure neutral
Cyclicality high
Moat narrow
Leverage high
Earnings quality medium
Management high
Trajectory stable
Value-trap signals · 3
  • BoCom associate carrying value materially above fair value with recurring impairments
  • Hong Kong CRE ECL charges have become recurring rather than transitory
  • Heavy reliance on rate cycle and structural hedge to sustain mid-teens RoTE

HSBC Holdings plc (HSBA) — Investment Research Note

Executive summary

HSBC is one of the world's largest international banks, with its centre of gravity in Hong Kong/Asia and the UK and a wholesale franchise levered to global trade, payments and FX. Over the period covered the bank completed a major portfolio reshape (exits from Canada, France retail, Argentina, Russia; SVB UK acquired in Mar-2023; Hang Seng privatised in 2025 for US$13.7bn) and pivoted from "transformation" to "value creation", delivering record 2025 profit before tax of US$36.6bn and a 17.2% RoTE ex-notables, with management now targeting ≥17% RoTE through 2028. The single most important point for valuation today is whether that mid-teens RoTE is structurally sustainable as policy rates ease — the market is pricing in continued delivery, leaving limited margin of safety.

Fair value estimate

  • Fair value range: 1,050p – 1,450p per share (mid ~1,250p)
  • Implied market cap range: £180bn – £249bn (mid ~£215bn) vs current £231.8bn
  • Absolute upside/(downside) to mid: ~(7)%

Methodology — blended P/TBV and P/E, cross-checked with dividend yield:

  • TNAV per share at 30-Jun-2025: US$9.17 ≈ £7.05 at ~1.30 USD/GBP. At a justified P/TBV of (ROE−g)/(Ke−g): assuming Ke 10%, g 3%, and a sustainable RoTE in a 13–17% range gives P/TBV of 1.43x–2.00x → 1,010p–1,410p.
  • 2025 underlying earnings to ordinaries ~US$1.55/share ≈ 120p. At 9–11x forward earnings: 1,080p–1,320p.
  • 2025 ordinary DPS US$0.75 ≈ £0.58. At a 4.5–5.0% sustainable yield: 1,160p–1,290p.

Methods cluster around 1,100p–1,350p. Current ~1,349p sits at the top of the range, reflecting recent 1Q26 RoTE of 18.7% (ex-notables) and the new 17%+ target. 2026-05-08 AGM; 2025-07-30 interim.

Sector context

  • ICB super-sector confirmed: Banks (Financials). HSBC is the largest UK-listed bank by market cap and assets (US$3.3tn at 31-Mar-2026).
  • Quality: above sector — diversified across Asia/Europe/Middle East, leading transaction-banking franchise, strong CET1 (14.6% at 30-Jun-2025).
  • Growth: in line/above — wealth and transaction-banking growth offset rate normalisation; targeting 5% revenue growth by 2028.
  • Leverage: in line with global bank peers; well capitalised.
  • UK-listed peers: Standard Chartered (STAN), Barclays (BARC), Lloyds (LLOY). HSBC is most similar to STAN given the Asia/EM tilt.

Investment thesis

  • Sustained mid-teens RoTE underpinned by structural hedge and wealth fees. Management has reaffirmed a 17%+ RoTE target each year 2026–2028 and a 50% payout, with 1Q26 RoTE annualising at 18.7% ex-notables and revenue +4%, evidencing momentum past the rate-cut cycle 2026-05-08 AGM Statements.
  • Capital-return engine. US$18.9bn returned in respect of 2025 (US$12.9bn dividends + US$6bn buy-backs), 2025 ordinary DPS +14% YoY ex-special, and a further US$0.10 first interim 2026 dividend approved — a credible, repeatable distribution rather than a one-off 2026-05-08 AGM Statements.
  • Asian wealth and transaction-banking flywheel. Wealth revenue +22% on a constant-currency basis in 1H25, US$44bn net new invested assets (US$27bn in Asia), and Hang Seng privatisation deepens scale in what management calls the world's fastest-growing cross-border wealth hub 2025-07-30 Interim Results; 2026-05-08 AGM Statements.

Key risks

  • Hong Kong / mainland China commercial real estate. 1H25 ECL included specific charges in the Hong Kong CRE sector with model updates and rising defaulted exposures; FY25 ECL guidance was raised to ~40bps of average gross loans 2025-07-30 Interim Results.
  • BoCom associate impairment. 1H25 took US$1.0bn impairment plus US$1.1bn dilution loss on the BoCom stake; the carrying value (US$22.1bn) remains materially above fair value (US$11.1bn) — further write-downs are possible if mainland China earnings forecasts deteriorate 2025-07-30 Interim Results; Note 10.
  • Macro/geopolitical. The 2026 AGM flagged the Iran conflict, energy-price disruption and renewed inflation risk as adding "unpredictability" to the macro outlook; legal/regulatory tail risks (Madoff Luxembourg cases, US ATA litigation, FX/precious metals/gilts class actions) remain unresolved (not quantified) 2026-05-08 AGM Statements; 2025-07-30 Note 7.

Value-trap signals

  • BoCom carrying value (US$22.1bn) is roughly 2x its fair value (US$11.1bn) and has produced recurring impairments — a structural drag rather than a one-off.
  • Hong Kong CRE ECL charges have become recurring rather than fading, with FY25 ECL guidance lifted to ~40bps.
  • Heavy reliance on the rate cycle: banking NII guidance and structural-hedge income remain a material driver of the 17% RoTE; cuts beyond market-implied paths would test the target. None of these rises to a classical value trap (revenue is growing, dividends are rising, no opaque accounting), but they argue against paying a premium multiple.

Conviction: 4 — high

Drivers: clean and detailed disclosure (IFRS reporting, granular ECL/sensitivity tables, transparent notable-item bridges); long track record and multiple converging valuation methods (P/TBV, P/E, dividend yield) cluster tightly; bank valuation methodology is unambiguous. Caveats: terminal RoTE assumption (13% vs 17%) materially moves fair value; BoCom carrying value introduces a discrete, hard-to-time impairment risk that is not in consensus models.