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HSBC Holdings (LSE: HSBA) posted a 14% fall in third-quarter pre-tax profits this morning (28 October) but the share price jumped 3% in early trading. The stock had previously fallen back a bit in October in anticipation.
A $1.1bn (£824m) provision for costs related to Ponzi scheme perpetrator Bernie Madoff did some damage. And a further $1.4bn in legal provisions didn’t help.
It all means profit before tax for the quarter came in at $7.29bn, below estimates for $7.65bn.
Another bank crisis
We’ve just had the car loan mis-selling case that hit Lloyds Banking Group among others. Aren’t we getting a bit sick of the big banks and their regular slip-ups? Well, this one looks like it’ll just be a minor blip in the long-term scheme of things.
Behind the headlines, HSBC saw revenue rise 5% from the same quarter last year to $17.79bn, ahead of expectations. And net interest income jumped 15% year on year to $8.78bn.
CEO Georges Elhedery said: “The positive progress we are making gives us confidence in our ability to upgrade our targets and we now expect 2025 RoTE excluding notable items to be mid-teens, or better.”
Investors shrug it off
The HSBC share price reflects the long-term non-event nature of this Madoff case — which traces back to 2009, with HSBC Securities Services Luxembourg defending a claim.
As well as the reaction on the day, HSBC shares have gained 28% so far in 2025 by the time of writing. And we’re looking at a 204% rise in the past five years. On top of that, we have a forecast 5% dividend yield. And a stock with a forward price-to-earnings (P/E) ratio under 11.
Do HSBC shares look overvalued? Not to me they don’t. Analysts have the P/E falling as low as 8.5 by 2027 on the back of earnings growth forecasts. And that’s with well-covered dividend rises.
Bank valuations
Since the 2008 financial crisis crushed bank share prices, I think we’ve seen two levels of valuations: cheap, and very cheap. Right now, it looks to me like bank shares have bounced out of their very cheap phase and are now just cheap.
That doesn’t mean there’s no danger. A stock market sector that’s out of favour — largely because of bad management within itself — can be distrusted for many years to come. Other banking crises can — and I’m convinced will — emerge. Economic factors like falling interest rates will probably affect bank stock outlooks too.
In short, I expect a fair bit more volatility, including for the HSBC share price, in the years ahead.
Time to buy?
But I think investors should seriously consider HSBC, along with the other big FTSE banks, providing we can satisfy two key conditions. We’re in it for the long term, and we’re well diversified.
