The Motley Fool

HSBC’s Future Depends on These 3 Factors

Hang Seng Index constituent and banking giant HSBC Holdings plc (SEHK: 5) hasn’t done well in the past.

HSBC’s stock price has fallen around 34% year-to-date (as of 29 April) and the bank recently cancelled its dividend for the first time in 74 years. Since the beginning of 2000, the bank’s total returns have also been negative.

While HSBC’s stock has lagged in the past, its future isn’t set in stone. These three factors that could very well decide how HSBC does over the next ten years.

1. Execution

A company is often only as strong as its leader. If a company’s leader is capable and makes good decisions, the company’s stock price could increase.

If a company’s leader isn’t that great, then its stock could lag. Due to HSBC having had some poor-performing CEOs in the past who invested in low return areas, HSBC shares haven’t done well since 2000.

If HSBC’s new permanent CEO, Noel Quinn, executes and makes wise decisions, HSBC stock could generate good returns.

Quinn currently has a goal of pivoting more towards Asia and of increasing the bank’s return on tangible equity through a restructuring. If Quinn succeeds, HSBC’s profits could increase.

2. China

China will be a big potential growth market for HSBC in the future. Not only is China the world’s second largest economy now, but its economy will be even bigger due to economic growth.

HSBC’s total business in the country could also be larger because the bank is pivoting more to Asia in its latest restructuring efforts and China is opening up its financial sector to foreign companies.

This will give HSBC more opportunity to potentially gain lucrative business in segments such as China’s capital market. How well HSBC does – in arguably its largest growth market – will impact its stock.

3. Fintech

Fintech is both an opportunity and a threat to huge banks like HSBC. On one hand, fintech has the potential to create hundreds of billions of dollars in value in a relatively short amount of time  for companies that take advantage of the right opportunities.

As Tencent and Alibaba-backed Ant Financial have shown with mobile payments, even small marginal profits on a transaction can generate great returns if the customer base is large enough.

Given HSBC’s many millions of users, the bank certainly has a huge customer base and potential.

On the other hand, fintech companies can replace many of the services that HSBC typically offers and take the bank’s business.

Currently, HSBC views fintech as an opportunity. It doesn’t believe fintech will replace traditional banks in core areas given incumbent banks’ strengths in key areas such as established customer bases, brand recognition, strong balance sheets, and decades of regulatory experience.

In fintech, HSBC has invested a lot into developing new technology over the years and those efforts could pay off.  If the bank executes in fintech and uses big data and AI to better make loans, the its return on capital could increase.

Given the threats and opportunities, how HSBC handles fintech could affect its stock price in the future substantially.

Foolish conclusion

HSBC’s future stock performance will depend heavily on how well its management executes, how well it does in China, and how the bank handles the fintech revolution.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn't own shares in any companies mentioned.