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Earnings

How will HSBC’s share price react to Q3 earnings?

HSBC’s [HSBA.L] share price has had a tough 2020, battered by the coronavirus pandemic, political battles and record low-interest rates. As with other stocks, HSBC’s share price suffered during the market plunge of mid-March, but almost seven months on, amidst continued economic fears, it has failed to stage a lasting recovery. As the UK bank prepares to release its third-quarter earnings results on 27 October, what should investors expect from HSBC’s share price?

HSBC’s share price began the year at 569.50p on 2 January, before plunging to 397.20p on 3 April as COVID-19 first affected Asia — a key region for the bank — and then spread around the globe.

Investor sentiment was also bruised by low-interest rates, HSBC’s cancellation of its dividend, and criticism from Western politicians for its support of China’s national security law in Hong Kong.

 

 

HSBC’s share price recovered slightly to hit 422.00p in early June, despite a worse-than-predicted 48% plunge to $3.2bn in first-quarter profits. The bank also set aside £2.4bn in bad loan provisions.

However, a 65% drop in first-half profits to $4.32bn caused HSBC’s share price to slide again, settling at 324.95p on 6 August.

Worries that the bank could be placed on China’s ‘unreliable entities’ list, and reports that it was continuing to move money around for clients believed to be engaging in criminal activity, led HSBC’s share price to a 25-year low of 283.35p on 25 September.

It has recently recovered slightly to sit at 306.95p on 22 October after its largest shareholder, Chinese insurer Ping An [2318.HK], upped its stake to 8%, pinned on hopes that the bank would restore dividends and Chinese pressure would ease.

$4.32billion

HSBC's first-half profits - a 65% drop

  

Cost-cutting measures

Looking ahead to the third quarter, according to HSBC the current consensus forecast is looking for a pre-tax profit, on a stated basis, of $2.1bn, up from $1.1bn in the second quarter.

This will be substantially down on the $4.8bn recorded in the same period last year.

There are still concerns around bad loans and the threat of negative interest rates further pummelling margins.

“Loan and asset impairments cost HSBC $3.8bn in Q2 and analysts reckon they will chalk another $2bn off pre-tax profit in Q3, thanks to tough economic times in the US and Europe in particular,” said Russ Mould, investment director at AJ Bell.

“Loan and asset impairments cost HSBC $3.8bn in Q2 and analysts reckon they will chalk another $2bn off pre-tax profit in Q3, thanks to tough economic times in the US and Europe in particular” - Russ Mould, investment director at AJ Bell

 

“The lending margin on the loan book reached just 1.33% in Q2 and analysts think it will dip to 1.23% in Q3 as central banks keep interest rates and bond yields low. That 0.1% of lending margin adds up to $1bn a year in profits.”

HSBC is taking action to cut £3.4bn in costs via a three-year restructuring programme. It is slashing jobs, merging its private banking and wealth divisions, and reducing its US branch network.

 

Paying dividends

HSBC has the financial strength to get through the present headwinds and can eventually make it back to a share price of 500p, Roland Head wrote in TheMotley Fool.

“I suspect this may take quite a while, during which investors could face a lot of uncertainty,” he says.

The consensus among 24 analysts on MarketScreener give the stock an Underperform rating.

Credit Suisse also rates the stock Underperform, lowering HSBC’s share price target from 330p to 310p on 29 September.

Adrian Cighi, analyst with Credit Suisse, said there was a lot of caution around the bank such as lower revenue expectations, fragile UK and Hong Kong economies, and geopolitical tensions between the US and China.

UBS has a Neutral rating and a 310p target price while RBC rates the stock a Sell.

Restoration of HSBC’s dividend could boost shares, though. Ian Gordon, analyst with Investec, believes that the bank is able to pay out in 2020.

“After all, most banks are carrying material excess capital relative to regulatory minima,” he said.

Don’t expect a bonanza, however, as the payout is likely to be around 6.6p, compared with the 38.2p seen in 2018, according to AJ Bell.

 

Market Cap£65.024bn
EPS (TTM)-2.80
Operating Margin (TTM)29.03%
Quarterly Revenue Growth (YoY)-35.9%

HSBC share price vitals, Yahoo Finance, 26 October 2020

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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