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HSBC share price to fall on bad debt provisions?

HSBC headquarters in London

The HSBC [HSBA] share price has been an outlier among banking stocks in 2022 by outperforming its peers. Shareholders will be hoping that the group’s upcoming interim report, due on 1 August, will continue a strong year for the stock.

HSBC shares are up almost 9% this year and have risen 29% in the past 12 months, as of 29 July. In comparison, UK-listed banking competitors Lloyds [LLOY] and Barclays [BARC] have seen year-to-date share price falls of 9.6% and 21.5%, respectively, as the industry prepares for a wave of bad debt costs.

The bank predicts that second-quarter earnings will be slightly lower than in the first three months of 2022. Profit before tax is expected to come in around $3.98bn, marking a 4.6% decline from the pre-tax profit of $4.17bn that was seen in Q1. Total revenue, however, is expected to grow 2.8% to $12.81bn off the back of increased income from issuing higher interest loans.

The decline in earnings can be largely put down to an increase in provisions made to protect the company from a rise in future debt costs as the cost-of-living squeeze tightens. It is estimated that credit impairment charges will be $762m for the second quarter. The Chinese housing economy, in which HSBC has a large presence, has been slowing over the last year, which is also expected to dent the group’s income.

Q1 profits fall despite analyst beat

HSBC’s Q1 pre-tax profit of $4.17bn represented a decline of $1.6bn from the first three months of 2021. While this beat analysts’ expectations by £500m, the £600m hit from credit impairment charges led to a significant decline in earnings – as is likely to be the case again in Q2.

The net interest margin (NIM), which measures the difference between what the bank earns on loans and pays to savers, rose by seven basis points to 1.26% in Q1 compared to Q4 2021. Rising global interest rates have seen NIM rise across the sector, helping offset rising costs elsewhere in the industry.

As expected, first-quarter results focused heavily on adjusting to challenges brought by the Russia-Ukraine conflict. HSBC disclosed that its Russia exposure was worth $1.3bn, as of the end of April. This included $900m in local currency deposits. However, at the beginning of July, it was revealed that HSBC was in talks to sell its Russian business to privately owned Expobank. This comes after the bank was put under pressure from UK members of parliament to discard its business in Russia.

Analysts upbeat amid break-up demands

HSBC’s upcoming earnings report comes after Chinese insurance giant Ping An Insurance [2318.HK] pressured the group to split up its Asian and Western operations to unlock shareholder value. Ping An Insurance, which owns 9.2% of HSBC, believes that the bank would be worth more separately than as one united operation.

Michael Hewson, chief analyst at CMC Markets, noted that “while management have pushed back on these calls, the decision to separate the two businesses might become more compelling after the bank took the controversial step to allow the formation of a Chinese Communist Party committee in its investment banking subsidiary inside China”.

However, many investors fear that a break-up of the bank would destroy value rather than create it. It is believed the process would need approval in multiple countries, require the issuance of billions of dollars in debt and would take several years to complete.

Despite the number of challenges facing the company, analysts generally have a positive outlook for the HSBC share price. Out of 21 analysts polled by the Financial Times, four have a ‘buy’ recommendation, seven ‘outperform’, eight ‘hold’ and only two expect it to ‘underperform’. Alongside this, of 17 analysts offering 12-month price targets, the medium estimate was 580p. This implies a 12.9% increase on Friday’s closing price of 513.70p.

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