n HSBC Holdings [HSBA]
first full-year results under CEO John Flint, who took over in February 2018, revenues improved 4.5% year-over-year to $53.8bn – some $700m short of forecasts – while profits rose 13.5% year-over-year to $19.9bn.
Share price performance throughout the year proved less than stellar, as investors fretted over HSBC’s exposure to global cross-border transactions at a time of sanctions and rising protectionism. The London-quoted stock closed the year down 15.6% at 646.90p, compared with a 14.2% fall for the FTSE 100. Conversely, it lagged badly behind the blue-chip index’s vigorous 8.1% rebound in the first three months of 2019, rising just 3.6% during that time.
Flint confessed in a February Financial Times interview that he was “disappointed” at how revenues “collapsed” over the last few weeks of 2018. But at a general meeting in April, group chairman Mark Tucker highlighted the uncertainty surrounding the global economy as yet “to translate into higher credit losses”. Tucker explained that the FTSE 100-listed bank would instead focus on “making the most of the opportunities that unquestionably exist” in the current environment, such as lower barriers to trade.
Investors will likely be looking to know whether that’s still the case when the bank reports its first quarter of 2019 results on 3 May, alongside a highly anticipated update on the health of UK and Hong Kong mortgage books and how the bank plans to lower operational costs.
Asia’s growing wealth
Flint took over a bank that had made a strong pivot towards Asia under former CEO Stuart Gulliver. The continent accounted for 48.6% of group revenues in 2018, notably in both retail and commercial banking as well as wealth management, with revenue rising 11% higher than the previous year from double-digit growth in Hong Kong, mainland China and the Pearl River Delta.
“The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, and [make it] the leading international bank in China,” wrote Morningstar’s Michael Wu in February. Beyond corporate entities, HSBC wants to target the rising number of billionaires in Asia. The bank is building a team to serve ultra-high net worth clients in Asia, with plans to add 700 private banking jobs in the region by 2022.
|PE ratio (TTM)
HSBC stock vitals, Yahoo finance, 29 April 2019
The bank’s exposure to Asia has been both a blessing and a curse: while investors recognised HSBC’s strong positioning in global trade, last summer’s emerging markets meltdown and the fallout from the US-China trade war cast a shadow on the bank’s growth prospects. Nicholas Hyett, equity analyst at Hargreaves Lansdown, put it best when he said: “If China sneezes, HSBC will come down with a bad case of the flu.”
Speaking to analysts during the annual earnings call in February, Flint acknowledged that the US-China trade war was “causing customers to pause”, but observed that Asia’s growth was being driven by “demographic trends” like an emerging middle classes and higher savings. “All of those drivers remain intact,” he said. “And we've got a strategically privileged position for that, particularly in Hong Kong and Greater China.” He also professed his conviction that China would “avoid a hard landing and continue growing”.
“If China sneezes, HSBC will come down with a bad case of the flu.” - Nicholas Hyett, equity analyst at Hargreaves Lansdown
UK and Hong Kong mortgages
The retail banking side of HSBC is highly profitable and provides it with cheap funding through deposits. But considering mortgages are first in the line of fire if a recession were to occur, the bank is exposed to some considerable risk. For Britain, that comes in the form of a hard-Brexit. In Hong Kong, borrowers face higher repayments from base rate hikes – the Hong Kong Monetary Authority pegs its rates against the Fed’s – and a steep correction in housing prices after a decade-long threefold increase, which Deutsche Bank analysts predict to see a fall of 25% by the end of this year.
Still, Wu at Morningstar noted that both in Hong Kong and the UK, loan-to-value ratios for HSBC’s mortgages are predominantly below 60%. “As such, we see limited credit risk with the bank also possessing first rights to the collateral,” he said.
Investment banking overhaul
Flint aims to post an 11% return on tangible equity by 2020, compared to 8.6% in 2018 and 6.8% in 2017. That’s an ambitious target, considering an HSBC-provided consensus sees it barely achieving 10.3% in 2021, which will likely require wide-ranging cuts. According to a Bloomberg article last week, Flint has berated executives’ “incompetence” in bringing expenses down, and the investment banking unit is set to be in his cost-cutting sights.
Targeted return on tangible equity by 2020
Already in February, Reuters reported that a cull was underway at the unit, and towards the end of the month, its former executive Gulliver stepped down. Fixed income instruments and equities trading revenues fell 8% and 6% respectively in 2018, suggesting that the bank won’t have escaped the income drought that hit the likes of JPMorgan and Goldman Sachs during Q1. As a result, Flint may be looking to overhaul the division, rather than making horizontal cuts. In March, the bank appointed 83 new managing directors and promoted 1,300 staff across its global banking and markets division.
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