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Can HSBC bank on its interim CEO to keep share price healthy?

Flint joined HSBC [HSBC] in 1989 and rose through the ranks to become CEO in February of last year. The announcement that he was stepping down on 5 August "by mutual agreement with the board" after being appointed just 18 months ago came as a surprise to many.

Even though chairman Mark Tucker thanked Flint for his "commitment" and "dedication", Flint’s day-to-day responsibilities ceased immediately, hinting at major concerns behind the scenes. Markets reacted by shaving 3.4% from its share price on the day of the announcement.

 

 

Challenging global environment

With more than 30 years of experience at the bank, Flint was seen as a reassuring force when he became CEO last year. His sudden departure sent shockwaves through the industry, especially as HSBC has been doing well of late – profit after tax for the first half of 2019 was up by 18.1% to $9.9bn, and revenue was up 7.6% to $29.6m in the six months to 30 June. 

Elsewhere, reported revenue in Asia was up 7% in H1, compared to H1 2018, and lending was up 5% by the end of 2018. However, the economic slowdown in China, a reignited trade war and Hong Kong tension, look to have dampened the outlook for the region.

Tucker said: "In the increasingly complex and challenging global environment in which the bank operates, the board believes a change is needed to meet the challenges that we face and to capture the very significant opportunities before us.”

The former CEO will not be the only HSBC employee to lose their job as cost-reducing plans announced by the bank are likely to result in as many as 4,700 jobs being cut – around 2% of its total global workforce. 

“In the increasingly complex and challenging global environment in which the bank operates, the board believes a change is needed to meet the challenges that we face and to capture the very significant opportunities before us” - HSBC chairman Mark Tucker

 
 

Will the new interim CEO make the cut?

Financials analyst John Cronin at stockbroker Goodbody believes Quinn is a shoo-in to become the CEO full time. “Based on his comments on the call, it would seem Noel Quinn is a serious contender for the seat on a permanent basis – and we would argue that, for a business as complex and challenging as HSBC is, it is probably sensible to stick with an insider (despite the Flint experience) in this environment,” he said.

Quinn, the 57 year-old head of HSBC’s global commercial bank, is said to be taking over in the interim due to his “pace… decisiveness… and ambition”, according to Tucker. "All of these things are important in the next stage and we feel he’s the right man for this time,” he says.

 

Quinn’s challenges

However long Quinn's stay as CEO will be, his immediate problems include juggling international concerns alongside a need to rebuild confidence with investors and shareholders.

Beijing’s concern that HSBC may have passed information to the US Department of Justice in 2017 to secure the arrest of Huawei’s chief financial officer Meng Wanzhou cannot be underestimated when it comes to the bank’s current woes, especially as Hong Kong is a key market for it.

On the other side of the US-China trade war, the Federal Reserve's decision to cut its benchmark rate in July for the first time in more than 10 years has raised concerns, with HSBC stating in its interim results that it does not expect to achieve its 6% RoTE target in the US by 2020.  

 

Market cap £124.14bn
PE ratio (TTM) 8.86
EPS (TTM) 69.10
Operating Margin (TTM) 37.58%

HSBC share price vitals, Yahoo Finance, 14 August 2019

 

As of 12 August, Zacks Investment Research gave HSBC a forward P/E ratio of 10.10 – considerably cheaper than industry and sector averages. If analysts do see Quinn as capable of navigating all the aforementioned headwinds, the current share price could suggest a decent buy point. 

At the moment, however, six out of nine analysts on Nasdaq recommend the stock is a ‘sell’.

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