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HSBC share has limited rise – Trefis

[Updated 06/03/2021] HSBC Rating Update

HSBC shares (NYSE: HSBC) has gained around 24% year-to-date, from around $ 26 at the start of 2021 to around $ 32 currently. Trefis estimates HSBC valuation at around $ 33 per share – 4% above the current market price. Growth in 2021 was in line with the rally seen in US bank stocks, which benefited from the approval of the stimulus package, a rapid vaccination campaign against Covid-19 and the Fed’s decision to hold rates. close to zero.

HSBC outperformed consensus estimates for revenue and earnings in its recently released first quarter FY2021 results. It said total income of $ 13 billion, down 5% year-on-year, mainly due to a 14% drop in net interest income (NII). The NII suffered from a lower interest rate environment – the net interest margin (NIM) declined from 1.54% in the first quarter of 2020 to 1.21% in the quarter, partially offset by a increase in interest-bearing assets. On the other hand, the banking and global markets (GBM) sector recorded a growth of 7% year-on-year, mainly driven by higher income from investment banking and equity trading. In addition, the bank’s adjusted net income of $ 3.9 billion increased 117% year-on-year, mainly due to a significant decline in provisions for credit losses – from $ 3 billion to -435 million. of dollars.

The bank reported revenue of $ 50.43 billion for the full year of 2020, 10% lower than a year ago. This was explained by a 14% year-on-year decline in the retail banking and wealth management segment, followed by a 13% decline in the commercial banking division. The decrease was mainly due to headwinds in interest rates, which had a negative impact on net interest income. While core banking revenues declined during the year, growth in sales and trading activities was able to partially offset weakness in other segments. That said, we expect core banking income to experience stagnant growth in fiscal 2021, due to the impact of the rate cut, which is not expected to experience a rapid return to levels of interest. before Covid-19. In addition, sales and trading revenues are expected to normalize as the economy recovers. Overall, the above factors will likely limit HSBC revenue to $ 51 billion in fiscal 2021.

Additionally, the bank increased its provisions for credit losses from $ 2.8 billion to $ 8.8 billion in 2020, to offset the higher risk of default. That weighed on the bank’s adjusted net income, slashing it 35% year-on-year to $ 3.9 billion. The amount of the allowance has declined in recent quarters, signaling some recovery in its clients’ loan repayment capacity. In addition, we expect it to experience a favorable decline in the following months, increasing HSBC’s profitability figures. This will likely result in EPS of $ 1.96, which together with a P / E multiple of nearly 17x will lead to a valuation of $ 33.

[Updated 01/05/2021] Is HSBC Stock Still Undervalued?

HSBC shares (NYSE: HSBC) has lost nearly 35% since early 2020 and is down 8% from the lows of March 23. Trefis estimates HSBC valuation at around $ 25 per share – slightly below the current market price. HSBC, one of the world’s largest banking and financial services organizations, with a significant loan portfolio of approximately $ 395 billion in retail bank loans and $ 346 billion in commercial loans (based on 2019 data) , is very sensitive to changes in interest rates. In Q3 2020 results, HSBC reported revenue of $ 11.9 billion, 11% lower than a year ago, mainly due to a 15% drop in net interest income year-on-year, partially offset by growth in trading revenues. In addition, its net interest income for the cumulative nine months is down 8% year-on-year.

We are waiting HSBC revenue to stay around $ 51.6 billion for full year 2020 – 8% lower than a year ago, mainly due to the lower interest rate environment. In addition, its net profit margin is expected to decrease from 10.6% in 2019 to 8.6% for the current year due to a large build-up of provisions for credit losses, reducing EPS to $ 1.10 for Fiscal 2020. Revenue is expected to increase slightly to $ 51.9 billion in fiscal 2021 thereafter, primarily due to some growth in retail and commercial banking. In addition, the net profit margin should improve to 14.7% due to a favorable decrease in provisions for credit losses. This should improve EPS to $ 1.89 which, together with the P / E multiple of around 13x, will lead to a valuation of $ 25.

[Updated 08/31/2020] HSBC appears undervalued as Asian economy gets back on track

HSBC shares (NYSE: HSBC) lost nearly 40% – from $ 40 in late 2019 to around $ 24 in early April – before falling further to around $ 22 now. This implies that the stock is about 45% lower than at the start of the year.

There are several reasons for this: The Covid-19 epidemic and the economic downturn have lowered market expectations for 2020 and consumer demand in the short term. This could have a negative impact on businesses and individuals, affecting their ability to repay loans and exposing HSBC to significant loan losses. In addition, geopolitical uncertainty due to heightened tensions between the United States and China continues to weigh on the bank’s performance.

But does that mean HSBC stock is undervalued? Of course he does. Trefis estimates HSBC valuation at around $ 26 per share – around 20% above the current market price – based on an upcoming trigger explained below and a risk factor.

The trigger is an improved trajectory for HSBC revenue over the second half of the year. We expect the company to report 2020 revenue of $ 52.5 billion, lower than the 2019 figure. Our forecast stems from the belief that as economic conditions have started to deteriorate. recover in the third quarter, the bank’s performance will improve steadily. In addition, easing foreclosure restrictions in most countries around the world is likely to help consumer demand, which will benefit the overall business scenario. Additionally, HSBC’s banking business in Asia remained strong, with the bank posting earnings of over $ 7.3 billion in fiscal 2020. The bank’s investment banking operations drove positive growth in Q1 and Q2 revenues due to higher transaction volumes, with the bank’s trading revenues up 35% in H1 2020 compared to the prior year period. Similarly, HSBC’s advisory and underwriting fees saw significant growth in the first half of 2020 due to a surge in debt underwriting operations following the Fed’s stimulus. This partially offset the impact of weak revenues in other segments. While we would expect trading income to decline in the following quarters, it is likely to be even higher than a year ago. Overall, we see the bank reporting EPS in the range of $ 1.02 for fiscal 2020.

Subsequently, HSBC’s revenues are expected to improve to $ 53.7 billion in fiscal 2021, as higher retail revenues, partially offset by lower revenues from sales and sales. transactions. In addition, the net profit margin is expected to increase year over year due to lower provisions for credit losses, leading to EPS of $ 1.91 for fiscal 2021.

Finally, how much should the market pay per dollar of HSBC profit? Well, to make almost $ 1.91 a year from a bank today, you would have to deposit around $ 191 into a savings account, which is around 100 times the desired earnings. At the current HSBC stock price of around $ 22, we’re talking about a P / E multiple just below 12x. And we think a figure closer to 13.5x will be appropriate.

That said, banking is a risky business right now. Growth looks less promising and the short-term outlook is less than optimistic. What is behind this?

HSBC has a large portfolio of consumer, business and wealth management loans – over $ 1,000 billion in fiscal 2019. The economic downturn could deteriorate the loan repayment capacity of its consumers, exposing the bank to significant defaults. In anticipation of this risk, HSBC has increased its loan loss provisions from around $ 1.1 billion in the first half of 2019 to $ 6.9 billion so far, a 6-fold jump. If the economic situation deteriorates, this figure could increase further in the following months. In addition, a negative economic outlook will make it costly for the bank to attract financing, which will increase the cost of its operations. In summary, we believe HSBC stock is currently undervalued and offers upside potential, given its strong retail and investment banking operations.

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