Barclays upgrades HSBC to "overweight," citing strong growth and market conditions

Investing.com -- HSBC’s (LON:HSBA) stock has been upgraded to "overweight" by analysts at Barclays (LON:BARC), who cite a strong earnings outlook, strategic realignments, and favorable market conditions, particularly in Hong Kong, as key drivers of growth, in a note dated Tuesday.

The reassessment follows an in-depth review of HSBC’s financials, capital return potential, and market positioning, particularly in Hong Kong, which continues to provide a robust earnings backdrop.

A number of factors led Barclays to upgrade HSBC, indicating the bank is well positioned to grow earnings and increase shareholder return.

One of the primary catalysts for the reassessment is HSBC’s updated strategy, which focuses on cost efficiency and revenue optimization.

As per Barclays, this shift offers substantial upside potential in earnings compared to consensus estimates and could usher in a new phase of higher sustainable returns on tangible equity.

The bank is now expected to achieve a RoTE exceeding 17% by 2027, a figure that surpasses HSBC’s previously guided mid-teen targets.

Another critical factor behind the upgrade is the strength of HSBC’s operations in Hong Kong.

The bank has benefited from a favorable economic environment characterized by strong liquidity and increasing Southbound capital flows from China.

This backdrop has driven deposit growth and asset under management (AUM) expansion, boosting HSBC’s banking net interest income (NII) and reinforcing its position in wealth management.

Barclays projects that these trends will continue to support above-consensus growth in both NII and non-interest income segments.

Additionally, HSBC’s capital return strategy has been highlighted as a major strength. The bank is generating enough capital to fund its restructuring efforts while maintaining consistent shareholder distributions.

Barclays estimates that capital return yields could rise to 12% by 2027, implying that HSBC is poised to return close to 40% of its market capitalization over this period.

The bank’s restructuring, which includes strategic exits from lower-margin businesses and a focus on high-return segments, further solidifies this outlook.

On the valuation front, HSBC’s shares are trading below their long-term average price-to-earnings multiple, presenting a potentially attractive investment opportunity.

Barclays has increased its price target for HSBC to 1,200p from 940p, reflecting an improved earnings trajectory and a lowered cost of equity assumption.

Under the revised estimates, HSBC is projected to trade at 6.8 times its 2027 earnings per share, significantly below its long-term average of approximately 12 times.

While HSBC’s future prospects appear strong, Barclays acknowledges potential risks to this outlook.

A sharp downturn in U.S. interest rates or heightened geopolitical tensions, particularly trade-related disruptions involving China, could negatively impact earnings.

Additionally, execution risks tied to HSBC’s restructuring efforts could present challenges. However, Barclays maintains that these risks are manageable and do not detract from the broader positive outlook for the bank.

Shares of the bank were down 1.3% at 06:35 ET (11:35 GMT).