Where will HSBC's share price be in 5 years?

Later this month, interim CEO Noel Quinn is set to unveil a strategic plan that will shape HSBC [HSBA] for the next decade. Only six months ago Noel Quinn replaced the ousted CEO John Flint as chief executive. But with profits - and HSBC’s share price - falling, can Quinn’s plan get the bank back to long-term growth?

 

How has HSBC’s share price performed the past 5 years?

Over the past 5 years, HSBC’s share price is down over 3%. Yet, since this time last year, the share price has tanked 11%. Still, at least this is better than both Lloyds [LLOY] (-24%) and Barclays [BARC] (-24%).

Brexit and trade wars have hurt the share price, as have lacklustre earnings. Q3 results saw profits at the bank fall by 25% to $3 billion. If Quinn is to get HSBC's share price moving in the right direction, reducing costs and protecting profits needs to be top of the agenda.

 

 

 

What are HSBC’s growth drivers over the next 5 years? 

Noel Quinn's strategic plan

In HSBC’s Q3 earnings call, Quinn didn’t mince his words, about what the bank needed to do to get back on track:

‘Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities.’

The first part of this accelerated plan will undoubtedly involve cost-cutting. Expectations are that 10,000 jobs will go on top of the already announced 4,700-plus redundancies.

 

HSBC’s investment banking arm also needs to shrink. Last quarter the Global Banking unit spent more money in Q3 than it managed to bring in. Divesting underperforming business units in the US and Europe should help.

Quinn's predecessor lost his job, in part, over a squeamishness to cut headcount. This doesn’t seem to be an issue for Quinn. Full details of the new strategic direction will be revealed on 18 February - and are a must-watch for shareholders pondering the long-term future of the bank.

 

Continuing to pivot to Asia

The second part of Quinn’s strategy looks like a doubling down on the bank’s pivot to Asia. 

With China's population increasingly middle class, HSBC has sought to capitalise -  investing billions in China’s Pearl River Delta region. In many ways, this insulated HSBC from the hurly-burly of the UK economy post-Brexit vote. What it hasn't insulated HSBC from is the US-Chinese trade war.

Other headwinds like the coronavirus and protests in Hong Kong - where HSBC have shut several banks - will weigh on short-term earnings. But in the long-term, the focus could pay off.

But with HSBC underperforming in the west, shifting resources to Asia is a logical move. One insider told the Financial Times:

“There’s some very hard modelling going on. We are asking why we have so many people in Europe when we’ve got double-digit returns in parts of Asia.”

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There’s some very hard modelling going on. We are asking why we have so many people in Europe when we’ve got double-digit returns in parts of Asia”

 

What do the analysts think?

In November, Jefferies upped its rating on HSBC from Hold to Buy. Jefferies raised its price target from 691p to 790p - a hefty 35% upside on the current share price.

Yet, analysts are undecided on which way HSBC will go. Of the 21 analysts tracking the stock on Yahoo Finance, almost half rate it a Hold.

 

HSBC share price vitals, Yahoo Finance, 10 February 2020

 

For income-seeking investors, the bank's dividend carries a 5.48% forward yield. A 9x price to earnings multiple is better value than both Lloyds (20.3x) and Barclays (17.54x).

So should HSBC offer Quinn the top post on a permanent basis. Ronit Ghose, a banks analyst at Citi, has an answer:  “The stock market is expecting the new strategy . . . to be presented by a permanent CEO. Anything else is like saying we are going into battle, it will be messy, and we don’t know the general in charge.”