HSBC share price rated a ‘hold’ on expectations of lower capital ratios

The HSBC share price performance has stood out compared to its UK banking peers so far in 2022 but with analysts forecasting mixed earnings, the stock could face downside pressure. While shares in the group have received a series of positive analyst upgrades in the weeks running up to its results announcement, it has a consensus ‘hold’ rating.  

Although HSBC [HSBA.L] shares have had a turbulent seven months, the stock has outpaced rival UK stocks. The outperformance bodes well for the Asia-focused group as it prepares to report its H1 interim update on 1 August, however, analysts have a mixed outlook.

According to coverage compiled by HSBC, 17 analysts covering the bank expect net operating income to come in 8.3% higher than the previous quarter’s $11.8bn at $12.8bn. Pre-tax profit, however, is forecast to come in around 7.1% lower at $3.9bn.

While the economic downturn is expected to be a returning headwind in HSBC’s upcoming earnings, its share price has performed relatively well in comparison with its peers in the banking sector. At the close on 28 July, the HSBC share price was up 17.7% year-to-date and up 32.7% over the past 12 months. In comparison, UK banking rivals Barclays [BARC.L] and Lloyds [LLOY.L] were down 17.7% and 4.2%, respectively, since the start of the year.

Q1 earnings miss expectations

After a disappointing first quarter announcement, investors will be hoping HSBC can deliver a more optimistic result in this week’s update. In the first three months of 2022, pre-tax profits fell $1.6bn from the year-ago quarter to $4.2bn. This was in part attributed to a $600m charge for expected credit losses as a result of Russia’s invasion of Ukraine and a slowdown in China’s property market.

While profits beat analysts’ forecasts of $3.7bn, HSBC failed to meet expectations on its earnings and revenue. The bank reported earnings per share of $0.14, missing CNN Money analysts’ guidance by 26.3%. Revenue also narrowly missed consensus estimates, coming in at $12.5bn, compared with the $12.6bn forecast. This represented a 4% year-over-year decline, with the wealth and personal banking division particularly hit due to Covid-19 restrictions in Hong Kong.

Although the bank said that the war in Ukraine has “increased uncertainty on the forward economic outlook”, it remained confident that, “despite inflationary pressures”, it is still on track to deliver mid-single-digit lending growth and revenue growth in 2022. The conflict has brought challenges for HSBC as the bank has around $1.3bn of exposure in Russia as of April, but it was reported in July that it was in discussions with Russian bank Expobank to sell its assets in the country.

HSBC was confident that it can enact more than $2bn of cost savings over the year to ensure operating expenses remain in line with 2021 levels.

Ping An Insurance pushes for HSBC breakup

After climbing steadily throughout much of January and February, the impact of the war in Ukraine on global markets caused shares in the group to spiral in early March amid rising inflation and economic turmoil.

More recently, the bank has faced pressure after its largest investor, Ping An Insurance [2318.HK], called for it to be divided into two separate entities. The company, which holds a 9.2% stake in the firm, has suggested the bank be broken up into eastern and western units.

While a report by Hong Kong-based In Toto Consultancy and commissioned by Ping An Insurance found that an Asian spinoff of the bank could unlock $26.5bn of market value, Bloomberg called the plan “deeply unconvincing” and the results of the report “underwhelming” as there is a risk of global revenue being lost when the bank separates.

Following the release of the report on 12 June, the HSBC share price gained 5.5% in the days that followed, suggesting that investors were unfazed by the potential risks of the breakup plan.

Analysts expect lower capital ratios in Q2

Analysts are also optimistic on the HSBC share price on the back of its fairly strong performance this year. As of 21 July, the bank had a consensus ‘hold’ rating from 21 brokers polled by the Financial Times, with seven analysts holding this rating — down from 10 in August 2021. The 17 analysts offering 12-month price targets for HSBC have an average target of 580.07p, which represents a 13% upside from the 28 July closing price.

The stock has received several upgrades from brokers in recent weeks, with Morgan Stanley raising its price target from 590p to 624p earlier this month and Redburn upgrading its rating from ‘neutral’ to ‘buy’ at the end of June.

Looking ahead to 1 August earnings call, analysts expect that net income will be boosted by rising interest rates, though Credit Suisse wrote in a recent note that the growth in net income is likely to be offset by another quarter of weaker results in the wealth division and lower capital ratios, Reuters reported.