- Bank’s Q3 results would have easily beaten estimates had it not been for new Madoff-related costs
- Net interest margins and income continue to exceed expectations
- Loan losses remain relatively low
- Dividend payment unchanged and buybacks on temporary hold after Hang Seng Bank acquisition
“HSBC’s third-quarter profits fell year-on-year, due to an additional $1.1 billion in legal provisions relating to the Bernie Madoff fraud case of over 15 years ago, but had it not been for that ghost of the past the numbers would have exceeded expectations,” says AJ Bell investment director Russ Mould.
“The shares are up, as investors peer through the headline numbers to the underlying ones, and they like what they see. Net interest income on the loan book remains strong, loan losses are limited and profits are healthy, which means there is plenty of scope for further cash returns – providing there is no unexpected economic slowdown.
Source: Company accounts.
“For the moment, though, investors seem confident that presidents Donald Trump and Xi Jinping will reach some sort of accord this week to ease trade tensions and market concerns over how they could affect global economic growth. Further interest rate cuts from central banks could help to support growth, too, and reduce the risk of increased loan impairments, while the relatively steady rate of decline in headline borrowing costs does not seem to be unduly pressuring margins on the loan book.
Source: Company accounts.
“Loan growth did disappoint a little in the quarter, but signs of a return to form in both China and Hong Kong would help, and those trade talks, plus reforms and stimulus packages from Beijing, could yet help here. HSBC’s management is clearly confident in the outlook in Asia, and China and Hong Kong in particular, given the decision to pay $13.6 billion for the 37% stake in Hang Seng Bank it does not own and take total control of the financial services provider.
Source: Company accounts.
“The additional $1.1 billion in legal costs relating to the investment fraud committed by Bernie Madoff in the early 2000s is clearly as disappointing as it is unexpected, and HSBC has tucked away a further $0.3 billion in provisions relating to trading activities at HSBC Bank plc. Investors have been pleased by how the FTSE 100 member has managed to keep out of trouble of late, and they will hope this is just a blip.
“The upward share price move suggests they are willing to take this on trust for now, especially as this is the first quarter with more than $200 million of litigation and conduct costs since late 2019.
“In addition, there is no sign of any marked deterioration in the loan book. Charges for sour loans have jumped as interest rates have gone up from all but zero in the West, but the quarterly run rate is nothing out the ordinary, even allowing for further provisions against loans in the Hong Kong and Chinese commercial real estate markets.
Source: Company accounts.
“Again, signs of a recovery here could be a further positive development and help to limit losses and support the bank’s profits overall.
“Analysts’ forecasts suggest that they expect the good times to continue to roll. Even allowing for the new Madoff costs, consensus forecasts are for stated pre-tax profit in excess of $30 billion for the third year in a row in 2025, with two better years to come in 2026 and 2027.
Source: Company accounts, Marketscreener, consensus analysts' forecasts.
“These earnings, if attained, are way ahead of what HSBC achieved at the peak of the cycle in 2006-07, just before the Great Financial Crisis hit, and this all helps to explain why the shares set a new all-time high earlier this month.
Source: LSEG Refinitiv data.
“The question now is how high the shares can go. Ahead of the profit peak in 2006-07, the shares topped out at 896p in November 2006, when the last stated book, or net asset, value per share figure was the 472p published as part of 2006’s interim results.
“That equated to 1.9 times historic book value. The shares currently trade on 1.5 times book value so bulls of banks, and financials more generally, could be tempted to suggest there is still value to be had, especially as HSBC offers a decent dividend yield and may well return to the buyback trail in 2026, all other things being equal.
“Sceptics may counter by arguing that any economic downturn or slowdown could quickly persuade investors that paying much more than 1.0 times book value would be a brave thing to do – a view that prevailed for much of the past decade when banking shares languished.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Standard Chartered book value multiple based on Q2 2025 results.
