Is HSBC (LSE:HSBA) Still a Buy After a 42% Rally? A Deep Dive into Valuation Divergence and Growth Sustainability

The recent 42% rally in HSBC Holdings (LSE:HSBA) has sparked debate among investors about whether the stock remains a compelling buy. To assess this, we must dissect two critical questions: Is the valuation divergence between HSBC and its peers justified? and Can the bank sustain its earnings growth amid evolving risks and strategic shifts? Drawing on Q3 2025 results, historical metrics, and sector benchmarks, this analysis evaluates HSBC's post-rally appeal.

Valuation Divergence: A Premium or a Premium Too Far?

HSBC's trailing twelve months (TTM) price-to-earnings (P/E) ratio stands at approximately 15.10x as of December 2025, significantly higher than the global banking sector's inferred median of 11.06x. This premium contrasts with historical trends: in 2020, HSBC's P/E was 9.52x, while the sector averaged 19.96x. Today, peers like Barclays (8.96x) and Santander (11.6x) trade at lower valuations, suggesting HSBC is priced for stronger earnings growth or perceived resilience.

The disparity is further highlighted by HSBC's price-to-book (P/B) ratio of 1.34, which values the bank at a modest premium to its book value. This aligns with its 14.17% return on equity (ROE), a robust metric for a global bank. However, the sector's broader skepticism-evidenced by a price-to-book ratio of 1.0, 67% below industry averages-raises questions about whether HSBC's premium reflects genuine outperformance or overoptimism.

Growth Sustainability: Earnings Momentum and Strategic Shifts

HSBC's Q3 2025 results underscored resilient revenue growth, with total income rising 4.6% year-over-year to $17.8 billion, driven by Wealth and banking net interest income (NII) as reported in the earnings release. Excluding a $1.4 billion legal provision for historical matters, the bank's adjusted return on tangible equity (RoTE) hit 16.4%, exceeding mid-teens guidance. This performance, coupled with a 14.5% CET1 capital ratio as detailed in the earnings release, positions HSBC to sustain dividends and reinvest in growth.

Historically, HSBC's earnings per share (EPS) have surged: from $3.60 in 2021 to $6.20 in 2024, reflecting compounded annual growth of 20%. However, this trajectory faces headwinds. The $1.4 billion legal charge in Q3 2025-a one-time item-masked underlying profitability, and recurring expenses could pressure margins. Additionally, while the bank upgraded its banking NII target to $43 billion for 2025 as noted in the quick-read, achieving this will depend on macroeconomic stability and interest rate dynamics.

Sustainability as a Strategic Lever

HSBC's commitment to sustainability is increasingly embedded in its growth narrative. The bank's Sustainability Pulse Survey 2025 reveals that 95% of corporates view sustainability as a commercial opportunity, with HSBC aligning its strategy to capitalize on this trend. For instance, 90% of businesses are integrating climate technology into their operations, a shift HSBC is positioning to support through its financial services. This not only mitigates regulatory risks but also opens new revenue streams, as 66% of executives report sustainability-driven revenue gains.

However, translating sustainability into financial performance remains a challenge. While HSBC's green revenue initiatives could unlock valuation premiums-BCG notes a 13% premium when green revenue exceeds 60% of total revenue-the bank's current ESG metrics lack granular detail. Investors demand clearer linkage between ESG efforts and financial outcomes, a gap that could temper long-term optimism.

Risks and Mitigants

The primary risk to HSBC's valuation is profit volatility. The Q3 2025 results included a $1.4 billion legal provision as detailed in the earnings release, a reminder of legacy liabilities that could resurface. While the bank's CET1 ratio of 14.5% as reported in the earnings release provides a buffer, deviations from optimal capital structures-such as excessive reliance on debt-can erode investor confidence.

On the positive side, HSBC's strategic reallocation to high-growth segments (e.g., Wealth and Premier Banking) and its dividend commitment of $0.10 per share as announced in the quick-read reinforce its appeal as a defensive play. Moreover, the bank's ROE of 14.17% suggests it can generate returns even in a low-growth environment.

Conclusion: A Buy, But With Caution

HSBC's post-rally valuation appears justified by its strong RoTE, capital position, and strategic pivots, but the premium over peers warrants scrutiny. The bank's 15.10x P/E implies expectations of outperformance, which hinges on sustaining earnings growth and managing legacy costs. For investors with a medium-term horizon, HSBC offers a compelling mix of defensive capital structure and growth potential in sustainability-linked markets. However, those prioritizing conservative valuations may prefer peers like JPMorgan (15.2x P/E) or Bank of America (14.5x), which offer similar growth profiles at lower multiples.

In the end, HSBC's post-rally appeal depends on whether its strategic bets-on sustainability, Wealth, and capital efficiency-can outpace sector-wide skepticism. For now, the stock remains a buy for growth-oriented investors, but one that demands close monitoring of earnings resilience and ESG execution.