HSBC’s [HSBA] share price slipped almost 5% after half-year results saw a greater-than-expected drop in profits. By its own admission, the bank is struggling with both the effects of the coronavirus and wider macroeconomic tensions. HSBC’s share price down 42.5% this year to date (through 31 July’s close). These concerns came to the fore in half-year results that saw profits slump and more cash needed to cover bad loans.
For some, the drop in HSBC’s share price will make it a bargain. For others, the half-year results will only underline the risks of buying banking stocks right now.
So, where next for HSBC’s share price?
What happened in HSBC's half-year results?
HSBC’s share price tumbled following the publication of concerning half-year results. Profits came in at $4.3bn for the second half of the year, down 65% from the $12.4bn seen in the same period last year and missing analyst expectations.
The amount estimated to cover bad loans grew from $8bn to $13bn, reflecting the huge sums other banks have had to set aside this earnings season. HSBC expects more businesses and companies to default on loans this year, so it wouldn’t be surprising if this figure continues to grow in coming quarters. So far, the bank has given 700,000 customers payment holidays on loans and credit cards.
HSBC's half-year profits - a 65% drop from last year's $12.4bn
“We do need to take costs down, as a result of the revenue pressures,” CFO Ewen Stevenson said in an interview with Bloomberg television.
To streamline costs, HSBC is accelerating its restructuring plans. The bank has announced it will cut 35,000 jobs from its 235,000-strong workforce. Most of the job losses will come from the bank’s European and US operations, reiterating the importance of its Asian ventures. In the US, HSBC will close a third of its 224 branches. The bank is aiming to reduce costs by 3% overall this year.
Is HSBC's share price worth buying?
Relationship with China
China's decision to impose new security laws on Hong Kong has opened up a diplomatic rift with the UK. HSBC has already come under attack for toeing the line when it comes to the new laws that forbid dissent in Hong Kong. Rumours that the bank's wealth managers have been helping pro-democracy protesters could see HSBC come under pressure from the Communist Party of China's authoritarian regime.
Shareholders have largely viewed HSBC's global outlook as a plus in recent years. The bank's focus on Asia’s market has helped it ride out the Brexit headwinds that hurt more UK-focused banks like Lloyds [LLOY]. In the current macroeconomic climate, though, transnationality is a double-edged sword. If tensions between the West and Beijing continue to escalate, HSBC's share price could suffer.
"Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC's footprint. However, the need for a bank capable of bridging the economies of east and west is acute, and we are well placed to fulfil this role,” said HSBC's Group Chief Executive Noel Quinn following the half-year results.
“Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC's footprint. However, the need for a bank capable of bridging the economies of east and west is acute, and we are well placed to fulfil this role” - HSBC's Group Chief Executive Noel Quinn
Relationship with the UK economy
Like other UK banks, HSBC’s results saw it set aside huge sums for the expected spike in bad debts. This has seen profits slump, even if it means the bank is more resilient than it was in the 2008 financial crisis. At any rate, HSBC's share price will need the global economy to recover quickly if it is to see any meaningful gains in 2020.
Given recent economic data, however, a speedy recovery is looking increasingly unlikely. Last week, Lloyds suggested that unemployment in the UK could hit 10% this year, which would lead to an increase in impairment charges on banks as people and businesses struggle to pay back debt.
If unemployment does hit this figure, Deutsche analyst Robert Noble reckons the banking sector will see impairments hit £59bn across the industry. These figures would almost certainly see HSBC's share price come under increased pressure.
|PE ratio (TTM)||18.22|
|Quarterly Revenue Growth (YoY)||-23%|
HSBC share price vitals, Yahoo Finance, 3 August 2020
Analysts seem doubtful as to whether HSBC's share price will recover. Of the 23 analysts tracking the stock on the Financial Times, half rate it as Underperform.
That said, an average 397.25p 12-month price target would see a 16.1% upside on HSBC’s current share price as of 31 July’s close. Achieving this target depends upon a thawing of tensions with China and a fast recovery from the havoc wrought by the coronavirus on the economy. Both of these are far from certain events at the moment.