The global banking group HSBC LON:HSBA this week reported results which beat market expectations, driven by strong net interest income. Underlying performance was mixed, with lower capital market and advisory activity as well as lower wealth management fees in Asia. Credit costs were higher, reflecting commercial real estate exposure in China.
Costs were well controlled, however. The outlook for 2023 disappointed the market, with no increase in net interest income expectations, despite higher rates and higher cost and credit charge guidance. Capital levels remain below the medium-term target.
The stock currently trades on 7.4x consensus 2023 earnings, a premium to its UK-listed peers. It has a prospective dividend yield of 7.0% in 2023. However, given the valuation and the fact that 50% of pre-tax profits come from Hong Kong and Mainland China, stockbroker Killik & Co says it remains Neutral on the stock.
We ran the stock through the machine learning engine at Bridgewise to see how HSBC is stacking up against its banking peers. Here we can see a picture of HSBC still performing reasonably well against its peers, despite the China exposure. Technical analysis sees the share price momentum in good shape.
HSBC’s stock is now priced above its 5-day, 50-day, and 200-day moving average, while its MACD (Moving Average Convergence Divergence) indicates that the stock’s price movement momentum is strengthening. Historically, this is a positive setup in the near, medium, and long-term. In particular, many institutional investors keep close watch of the 200-day moving average. We have seen some gains in the share price since the results came out.
Bridgewise is in a similar frame of mind to Killik & Co, and rates HSBC a hold (neutral). Running an AI comparison against its closest peers in global banking stocks, we can see HSBC holding its own. There is little to choose for example between HSBC and Barclays LON:BARC for example. Investors will note, however, that Lloyds LON:LLOY is looking like a strong buy at the moment and possesses some superior metrics to HSBC.
HSBC adjusted profits up 92%
HSBC’s adjusted profit before tax increased 92% to $6.8bn, beating consensus of $6.5bn. As a result, full-year adjusted profit before tax was up 17% to $24.0bn. Adjusted revenue increased 38%, beating expectations. The net interest margin increased to 1.74% from 1.57% in the third quarter, and 1.19% a year ago. Wealth and Personal Banking revenue increased 45%, primarily due to higher interest rates and balance sheet growth in most regions, partly offset by lower fees as a result of lower equity and mutual fund sales due to muted customer sentiment.
Commercial banking revenue increased 51%, driven by the impact of higher interest rates in Global Payments Solutions. Global Banking and Markets revenue increased 16%, driven by a strong performance from Markets and Securities Services given underlying market volatility, partly offset by lower fees from lower Capital Markets & Advisory activity.
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Credit provisioning was $1.4bn versus $0.5bn a year ago, equivalent to 0.55% loan loss charge, bridging the full-year number to 0.35%. The fourth quarter charge includes $0.6bn for mainland China commercial real estate exposure, with the remaining $0.8bn equivalent to a 0.30% loan loss charge, in line with through-the-cycle guidance of 0.30%-0.40%. The total mainland China commercial real estate exposure is $16.8bn, of which $7.3bn is considered either sub-standard or credit impaired. The are $1.7bn of credit allowances against this exposure. Management highlighted recent positive policy developments in mainland China’s commercial real estate sector.
Adjusted operating costs were 2% higher than a year ago, reflecting investing in digital capabilities and higher performance related pay, partly mitigated by cost-saving initiatives which reduced the cost base by 9%. The cost to income ratio improved to 51% from 69% a year ago. The bank has now delivered $5.6bn of cost savings across 2020-2022, with a further $1.0bn expected in 2023.
Customer lending fell $66bn, mainly due to a $81bn reclassification of loans primarily relating to the planned sale of operations in France and Canada, partly mitigated by growth in mortgage balances of the UK and Hong Kong.
Decline in HSBC’s core equity tier one ratio
The core equity tier one ratio increased 80bps over the quarter to 14.2%, however it was down 160bps from a year ago, with 80bps from regulatory changes and 70bps from fair value adjustments. While this is below the medium-term range of 14.0%-14.5%, management intend to get it back to within the target range by the first half of 2023 through revenue growth and cost control, as well as through risk-weighted asset and capital actions.
Return on tangible equity was 9.9% in the quarter. Tangible net asset value per share was $7.57.
For 2023, net interest income guidance remains at $36bn. Credit costs are now expected to be 40bps in 2022, driven by macroeconomic factors. Adjusted cost growth is now expected to be 3%, up from the 2% previously guided.
HSBC continues to target a return on average tangible equity of at least 12% from 2023 onwards and a dividend payout ratio of 50% for 2023 and 2024, with quarterly dividends reintroduced. Share buybacks will be considered from the first quarter of 2023.
