After strong Q3 results, where next for the HSBC share price?

The HSBC (LON: HSBA) share price has been volatile in recent years. It hit a five-year high of 791p on 12 January 2018, before falling to a low of 283p on 25 September 2020. It recovered to 455p on 8 March 2021, before again falling to 359p on 21 September 2021. And today, it’s at 445p.

Yesterday, the bank posted excellent Q3 results and sounded optimism for the future. Yet its share price only rose 2.5%. Some investors are worried about its increased exposure to the Evergrande crisis in China. And there’s also uncertainty as central banks grapple with rising inflation.

But Barclays has also reported superb Q3 results. And competitors Lloyds and NatWest are posting their own later this week. Investors may simply be waiting for more information on the other UK banking stocks before making their moves.

HSBC share price: excellent Q3 results

HSBC reported profit before tax of $5.4 billion, up 76% against Q3 2020. Revenue rose 1% to $12 billion, while fee growth was up $293 million, 10% higher than the same quarter last year. And the bank also reported strong liquidity, with a CET1 ratio of 15.9% against the regulatory requirement of 4.5%.

Because of its increased optimism, the bank has announced a $2 billion share buyback. CFO Ewen Stevenson said there are ‘multiple signs the UK economy is back…we have good confidence on a strong recovery.’

And the bank had set aside $8 billion for bad debt last year, which crashed its profits by 45%. But it’s now released $1.4 billion of these reserves, including $659 million this quarter. And as the global economy recovers, these reserves could find their way back into the hands of shareholders.

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Pivot to Asia

HSBC is in the middle of a strategic transformation, as it refocuses on its ‘pivot to Asia.’ It’s cutting $4.5 billion in global costs and has already sold loss-making operations in France and the US.

It’s moving $100 billion in assets to the region and investing $6 billion over the next five years to expand its Asia wealth business. The bank said this strategy change was encouraged by strong equity trading activity from its wealthy clients, as well as Hong Kong and Shanghai stock exchange volatility.

But pandemic restrictions across Asia, and particularly in Hong Kong, are still severe. And the city accounts for about a third of HSBC’S profit. This is a problem for the bank, due to the current geopolitical trade tensions between the UK, US, and China.

Stevenson believes that ‘as vaccination rates (in Asia) continue to increase, we will see a bumpy but sustained recovery.’ But this recovery is not certain. Moreover, while HSBC has sold out of its positions in Evergrande, there’s still a risk of second-order contagion from the crisis that would have a devastating effect on the bank.

Interest rate rises

CEO Noel Quinn said, ‘we feel like we are turning the quarter on revenue after absorbing the impact of interest rates.’ And recent rumblings from members of the Bank of England’s Monetary Policy Committee makes rate rises seem imminent. In its investor presentation, HSBC stated the ‘global interest rate outlook is improving, with the likelihood of 2022 policy rate rises having increased.’ As a deposit-rich bank, it will benefit hugely from interest rate rises — a 0.25% increase in UK rates would increase its annual income by $500 million.

But the FTSE 100 is up 4% over the past five years. Meanwhile, HSBC is down 28%. And while the HSBC share price is up 40% over the past year, it’s still a long way off the 584p it commanded prior to the pandemic on 14 February 2020.

For the bank to get back to those heights, it needs interest rate rises, a calming geopolitical situation and a carefully controlled inflationary environment. And these are by no means guaranteed.