The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Feb 25 (Reuters Breakingviews) - Now that HSBC HSBA.L is worth well over $300 billion, what would it take to hit a $400 billion market capitalisation? It's probably not the most pressing question facing CEO Georges Elhedery, who on Tuesday unveiled a new 17% minimum return on tangible equity target for the next three years. But the answer reveals something fundamental about the Asia-focused bank: its sprawling and relatively complex mix of businesses makes it hard to get a much higher valuation.

When Elhedery took over the 161-year-old group in September 2024, it was worth about $160 billion and traded roughly in line with its tangible equity. Now, the market capitalisation is $317 billion and the tangible book value multiple is a much healthier 1.9. The question is what comes next. The group's head of corporate and institutional banking, Michael Roberts, mused off-hand in an interview last month that a roughly $400 billion valuation could be within reach, phrasing the numbers in British pounds instead.

Achieving that - over, say, a year - would require a much higher valuation multiple. This time next year, HSBC would have to trade at 2.4 times end-2026 tangible book value, based on Breakingviews calculations using Visible Alpha data. The only rivals, using HSBC's self-selected peer group, in that valuation ballpark are U.S. behemoth JPMorgan JPM.N and Singapore's DBS DBSM.SI, with respective multiples of 3 and 2.6, according to Visible Alpha.

Elhedery's returns won't close the gap. First, investors already roughly expected him to hit the new 17% minimum number anyway. Second, JPMorgan's and DBS's higher valuation multiples are not simply a function of higher profitability. Analysts are expecting the two groups to make an average annual return of 19% across the next three years, per Visible Alpha. Projected earnings growth rates are similar too.

Instead, the missing piece for HSBC is resilience. Investors need to believe that its returns are robust enough to withstand an economic slump or geopolitical rupture. Bank investors express this through the "cost of equity", or the implied return required to hold a stock. A lower number reflects lower risk, and leads to a higher valuation multiple. For HSBC, the figure is now 9%, according to Breakingviews calculations, whereas JPMorgan and DBS are at 7%.

There's something mysterious about the process through which a bank gets a lower cost of equity, and therefore a higher stock-market rating. For JPMorgan, it probably relates to CEO Jamie Dimon's much-touted "fortress balance sheet", which has helped the group weather successive economic calamities. DBS may be boosted by its strong presence in the relatively stable and fast-growing Singaporean market.

HSBC, by contrast, is a more sprawling beast, covering everything from Mexican credit cards to UK mortgages and Asian investment banking. A sceptic would argue that there's more scope for something to go wrong, especially since the bank straddles a deepening divide between China and the West. Dispelling that perception is not really within Elhedery's gift, which means a $400 billion market capitalisation may not be either.

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CONTEXT NEWS

HSBC on February 25 said that it was aiming for a “17% or better” return on tangible equity (ROTE) in 2026, 2027 and 2028, excluding one-off hit like impairments and restructuring charges.

Before that announcement, analysts were on average expecting ROTEs of 16.6%, 16.8% and 17.4% respectively for those years, according to Visible Alpha data.

The Asia-focused lender also said that its year-on-year revenue growth would rise to 5% by 2028.

Shares in HSBC rose almost 5% as of 0900 GMT on February 25.

(Editing by Neil Unmack; Production by Shrabani Chakraborty)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))