- HSBC’s results mirror the pattern shown by big banks across the US, UK, and Europe
- Second-quarter earnings are better than expected, guidance for all of 2026 is higher and cash returns remain generous
- Investors must now think about valuation more closely as the UK banks trade much closer to their US peers after a storming share price run
“HSBC’s second-quarter results follow the same pattern as that of the other UK, US and EU-listed megabanks, with profits that are higher than expected, an increase to full-year guidance and bumper cash returns from dividends and a share buyback,” says AJ Bell investment director Russ Mould.
“The indifferent share price response may be partly down to familiarity breeding contempt, given the similarity in trends to other banks; partly down to how the $1 billion third-quarter buyback is smaller than expected; and partly down to valuation, as the shares are simply not as cheap as they once were, after quintupling from the Covid-inspired lows of 2020.
Source: Company accounts, company investor relations websites, analysts’ consensus forecasts prior to Q2 results.
“The FTSE 100’s Big Five banks – and recent index newbie Lion Finance, for that matter – all handily beat expectations as they made hay in the second-quarter sunshine.
“The global economy stayed on track, despite tariff, oil price and geopolitical turbulence, to help keep loan impairments low; interest rates stayed put, and loan and deposit growth were healthy, to support net interest margins; wealth management operations continued to draw in strong flows from well-heeled, sticky customers; and investment banks cashed in on volatility across equities, bonds, commodities and currencies.
Source: Company accounts
“Self-help programmes played a role, too, as boardrooms kept firm control of operating expenses. This can be seen in how each one of the Big Five showed a decrease in its cost-income ratio on a year-on-year basis between April and June, while litigation and conduct costs were modest, as the lenders kept out of trouble.
Source: Company accounts, company investor relations websites, analysts’ consensus forecasts.
“Aggregate pre-tax profits across the quintet came to £17.1 billion, a figure bettered only once, in the first quarter of 2023, and that three-month period benefited from $3.6 billion in capital gains at HSBC, on Silicon Valley Bank and the sale of its French retail banking arm.
“Each of Lloyds, NatWest and Barclays offered a record quarterly profit, Standard Chartered its second-best ever (just below the first quarter of this year) and HSBC its third-best three-month period. The only two stronger quarters at HSBC were Q1 2023 and Q1 2024, the latter helped by a $4.8 billion gain on the sale of the Canadian operations.
Source: Company accounts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered.
“The second-quarter results showed no deterioration in the quality of loan books. Even if HSBC took a further charge against its exposure to Hong Kong commercial real estate, the MFS fraud in the UK looks to be a thing of the past and the bank seems to think it has taken enough precautionary measures to cover itself against any further impact from events in the Middle East.
Source: Company accounts.
“This rosy picture helps to explain why analysts expect the Big Five to rack up record combined pre-tax profits in each of 2026 and 2027 and produce aggregate earnings that easily outstrip the pre-Great Financial Crisis peak of £35.8 billion back in 2007.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Barclays, HSBC, Lloyds, NatWest and Standard Chartered.
“It also explains why the Big Five believe they can fund dividend increases and share buyback programmes. NatWest’s buyback is on hold, as it digests its acquisition of wealth manager Evelyn Partners, but HSBC is on the buyback trail again after the three-quarter hiatus that followed its $13.6 billion purchase of the 37% stake in Hang Seng bank that it did not already own.
“In total, based on analysts’ consensus forecasts for dividends and the buyback programmes already announced, the Big Five are set to return £28.6 billion to shareholders this year, the equivalent of 5.4% of their current combined stock market capitalisation.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts.
“That figure looks good, although it is less impressive relative to the Bank of England base rate of 3.75% and the prevailing 10-year gilt yield of 4.95%. They have gone up and so have the banks’ share prices and stock market capitalisations.
Source: LSEG Refinitiv data.
“The issue of valuation, in either absolute or relative terms, is therefore a key one. After a stunning run, the banks are simply not as cheap as they were, and investors now have to decide whether they offer value or not.
“The days of the lenders trading at big discounts to tangible net asset, or book, value per share are long gone, although huge improvements in return on tangible equity help to justify such a re-rating.
Source: Company accounts.
“None of the Big Five trade at a discount to book anymore, and HSBC is a good example of why. At its post-Covid low of 283p in September 2020, HSBC traded at 0.46 times historic NAV per share.
“Its stock market capitalisation at that time was £57 billion. The bank has since paid out £40 billion in dividends to its investors and returned a further £24 billion via buybacks, with more to come.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, London Stock Exchange data.
“That prospect of more to come, with ongoing strong returns on equity, may be enough to keep investors interested, but the premium ratings to book value offer less downside protection in the event of any economic shock or earnings disappointment.
“The re-rating means the Big Five now stand on multiples of book value which are not far from those afforded to the major American banks, with the exception of JPMorgan Chase, which trades out on its own among the broad-based Big Four. That shows how far the UK lenders have come in cleaning up their act and improving financial performance.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, London Stock Exchange data.
“The next trick will be to maintain this, as that might help to tempt investors to pay higher multiples still, given that none of the UK’s Big Five yet trade on valuations which approach those seen in the go-go years before the Great Financial Crisis – though that is possibly a good thing given the risk-taking that was going on then.”
Source: Company accounts, London Stock Exchange data.
