HSBC adjusts global bank-stock country allocation: bullish on the U.S. and neutral on Mainland China

Overview

This is an HSBC global banking strategy report whose core purpose is to reassess the attractiveness of bank stocks by country under an updated macro scenario. The report argues that reduced Middle East tensions, the reopening of the Strait of Hormuz, and lower energy prices lowered inflation-peaking and growth-deceleration risks relative to the April scenario, improving operating conditions for the banking sector. Since the April report, bank stocks have outperformed global equities by about 2.8%, but cross-country dispersion has widened, so country allocation needs to be recalibrated.

Core views

The core view of the report is that bank valuations depend less on net interest margins or interest rates alone and more on the value-creation ability between ROTE and COE and the direction of that change. U.S. banks were upgraded to positive, supported by macro resilience, a stronger USD, loan growth, improving net interest income, and expected EPS growth. Mainland China banks, while trading at a discount, face weaker macro data with pressured consumption and investment, reducing near-term risk-adjusted returns, and were therefore downgraded to neutral. European banks remain favored because COE is still relatively high and M&A may become a realistic path toward deeper bank consolidation. In Asia, the report prefers markets such as Singapore, South Korea, and Japan with stronger momentum for shareholder return and governance reforms.

Analysis framework

The report uses HSBC's proprietary PEMCV framework to compare bank-stock country-allocation opportunities globally. The framework scores four dimensions—earnings/EPS momentum, country economic momentum, catalysts, and risk-adjusted valuation—and combines ROTE-COE spread, PTBV, P/E, macro policy, FX, and reform agenda to form positive, neutral, or cautious views.

Methodology notes

• equity_strategyPEMCV

  Earnings/EPS momentum, economic momentum, catalysts, risk-adjusted valuation

  HSBC uses this framework to assess banks' ability to create value and the direction of that change, and then applies it to country allocation across global bank stocks.

• Valuation methodsROTE-COE/PTBV regression

  ROTE and COE spread explain PTBV valuation

  The report regresses 2027e risk-adjusted ROTE against PTBV, used to judge whether market valuation is below fair PTBV or whether there is multiyear room for expansion in the ROTE-COE spread.

• macro_strategyMacro scenario update

  Energy prices, inflation, rate expectations, fiscal tightening, and FX changes

  Changes in the macro scenario are used to adjust assumptions for bank income, loan growth, asset quality, COE, and FX sensitivity.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US banks

  Upgraded to positive

  Strengths

  Macro resilience, USD support, loan growth, improving net interest income, and expected EPS and ROTE expansion.

  Weaknesses

  There is still debate over further rate hikes, and the sustainability of fee and trading income is uncertain.

  Comparison

  Upgraded from neutral to positive versus the April report, and have already outperformed the global bank index by about 2%.

  Risks

  If inflation or credit quality deteriorate again, or if bank income falls back, valuation re-rating could be constrained.

• Mainland China banks

  Downgraded to neutral

  Strengths

  The valuation discount is clear, at about 0.5x 2027e P/TBV; cost control and NIM have made some progress.

  Weaknesses

  Consumption and fixed-asset investment remain weak, macro data weaken the policy-driven normalization of COE, and EPS growth expectations are relatively low.

  Comparison

  Downgraded from positive to neutral versus prior views, and have underperformed the global bank index by about 14% since the last report.

  Risks

  If policy stimulus remains insufficient or macro data continue to weaken, banking activity and valuation recovery could stay under pressure.

• European banks

  Maintain positive

  Strengths

  The macro thesis of no further ECB/BoE hikes supports banks; COE remains relatively high, and M&A may drive deeper bank consolidation.

  Weaknesses

  Some countries remain constrained by fiscal, political, or sovereign risks.

  Comparison

  Compared with UK-neutral banks, European banks overall benefit more from COE improvement and potential structural catalysts.

  Risks

  Slower fiscal consolidation, delayed regulatory progress, or widening sovereign spreads could weigh on valuations.

• Singapore, South Korea and Japan banks

  Preferred Asian markets

  Strengths

  Investor-friendly reforms, higher shareholder returns, and governance improvement help support valuation re-rating.

  Weaknesses

  Asia still faces weak FX, sticky inflation, and potential further tightening pressure.

  Comparison

  Compared with Indonesia, the report prefers markets with clearer reform agendas.

  Risks

  If reform progress falls short, FX pressure, or rising food inflation could weaken the investment case.

• South Africa banks

  Upgraded to positive

  Strengths

  The economy has stronger buffers, outlooks have improved, and in an environment of no further hikes, EPS growth and ROTE levels are relatively attractive.

  Weaknesses

  Energy shocks and persistent retail NPLs remain pressure points.

  Comparison

  Upgraded from neutral to positive as risk-return improved under the revised macro scenario.

  Risks

  Fuel-price moves, inflation second-round effects, or a rebound in sovereign risk premia could drag on bank valuation.

Key data

• Relative performance of bank stocks vs global equities+2.8%Since the April report, global bank stocks have outperformed global equities.
• US banks relative to global bank index performance+2%Since the previous report, U.S. banks have outperformed the global bank index.
• U.S. inflationheadline CPI +4.2% YoY in May 2026HSBC expects U.S. CPI to be +3.3% in 2026 and +2.7% in 2027.
• U.S. bank earnings outlook2026-2028 EPS CAGR about 12%, 2025-2027 ROTE expansion about 200bpSupports upgrading U.S. banks from neutral to positive.
• Mainland China bank performanceUnderperformed the global bank index by about 14%Mainland China banks have clearly underperformed since the previous report.
• Mainland China bank valuationabout 0.5x 2027e P/TBV, average ROTE about 9%The valuation discount remains, but weaker macro pressure has reduced near-term risk-adjusted returns.
• South Africa bank valuation and earningsabout 2x 2027 P/TBV, about 11x P/E, average ROTE about 20%Under a revised macro assumption of no further rate hikes, South Africa banks were upgraded to positive.
• UAE bank valuationabout 1.4x 2027 P/TBV, estimated RoTE about 16%After a period of underperformance, valuation is now more attractive; the view was raised from cautious to neutral.

Impact & implications

For portfolios, the report recommends shifting from a single low-valuation tilt toward country rotation that combines macro resilience, COE improvement, reform catalysts, and shareholder returns. The U.S., Europe, parts of LatAm, South Africa, Saudi Arabia, and in Asia Singapore, South Korea, and Japan have higher allocation appeal; Mainland China, the UK, Indonesia, and UAE should be treated more cautiously or waited on for clearer macro and reform signals.

Risks

• A renewed rise in energy prices could again push inflation higher and suppress growth.
• If fiscal consolidation in key countries falls short, COE could rise and weaken bank valuations.
• Weak FX in Asia and food inflation may force central banks to maintain tighter policy.
• If Mainland China macro data continue to be weak, banking activity and valuation recovery could remain constrained.
• USMCA renegotiation in Mexico, political uncertainty in Brazil, and GCC geopolitical risks could still cause event-driven shocks.
• If bank credit quality deteriorates, NPLs rise, or loan loss reserves increase, earnings and ROTE expectations may be revised down.

What to watch

• Whether U.S. inflation, FOMC communication, and USD trajectory continue to support U.S. banks.
• Whether consumption, fixed-asset investment, fiscal stimulus, and policy reform in Mainland China improve bank risk-return.
• Whether M&A activity and bank consolidation in Europe create actual valuation catalysts.
• Progress in governance reform, dividend, and buyback policies in Asian markets such as Singapore, South Korea, and Japan.
• Oil prices, geopolitical risks in the GCC, deposit retention in UAE, and progress on reforms to foreign ownership limits in Saudi Arabia.
• South Africa inflation, the policy path of SARB, sovereign risk premium, and changes in retail NPLs.