HBCYF - HSBC: In Line Results Equal Weight Reiterated

2023-05-06 23:30:37 ET

Summary

• HSBC tripled its first-quarter profit thanks to higher rates.
• Buyback of up to 2 billion.
• The jump in profits was partly attributable to a $1.5 billion gain from its purchase of SVB's UK arm.
• Within our EU banking coverage, we still prefer other names.

The EU banking earning season is ongoing and a few of Mare Evidence Lab's banks already reported. Within our coverage, UniCredit ( Beat Across The Board ) and BNP Paribas ( Buyback Will Unlock Shareholder Value ) delivered solid numbers, outperforming Wall Street consensus estimates and exceeding our internal expectations. The rate hikes cycle supported by central banks is pushing up banking giants' profits and in Q1, the Anglo-Chinese HSBC Holdings plc (HSBC) (Hong Kong's most valuable stock) managed to triple its pre-tax profit to $12.9 billion (the bank recorded $4.2 billion in 2022 same period).

Benefiting from higher interest rates, HSBC managed to beat analysts' expectations. In detail, the bank reported a clean net profit of US$10.3 billion which was 61% above Wall Street average consensus estimates. This positive outcome was also impacted by a negative one-off of $3.6 billion due to a reversal impairment on France's retail banking sales. This transaction completion has become less certain and was not able to offset a gain from SVB UK's latest acquisition. Here at the Lab, we recently analyzed the SVB deal and believed this was a supportive catalyst in HSBC valuation and a great marketing maneuver. Looking at the numbers, HSBC explained that this SVB jump in profits is leading to an expected gain of $1.5 billion. However, this amount is still a provisional estimate.

Source: HSBC Q1 results presentation

Last March, as a reminder, the group acquired the UK SVB arm for only $1.20. It is also important to report the CEO's latest words, he emphasized how :

" HSBC has banked the entrepreneurs and with SVB, we have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they‘re a natural fit for HSBC, and that we‘re uniquely placed to take them globally“

Q1 results

Going deeper into HSBC results analysis, the company's net interest income reached $8.95 billion and signed a 1% beat. Despite that, we should recall that Q1 had a lower day count. Net interest margin was 1 basis point higher on an IFRS 17 basis and the reported NII also included a $1.4 billion interest cost for funding cost adjustment. According to HSBC, this is guided to remain flat around the current year. Non-net interest income was again a beat for 13%. According to our calculation, the bank delivered non-interest revenues of $11.2 billion, of which $2.1 billion was related to the France impairment of $1.5 billion on SVB provisional gain. Excluding those items, non-interest revenue was at $7.6 billion and 13% higher than consensus.

Operating costs reached $7.58 billion and were 2% lower than last year's numbers. This was due to cost-saving initiatives and in our estimates, in abs value, the cost will grow by 3% per year; however, thanks to a higher interest margin, they will be decremental on a cost/income ratio. We are estimating costs at $30.7 billion while the consensus is at $31.4 billion.

HSBC also developed LLPs of $432 million or 17 basis points with stage 3 balances very stable and modest changes in stage 1 and 2 credit performances (Fig 1). The company's fiscal year 2023 outlook is unchanged at 40 basis points, very much in line with our covered EU banking peers. For this reason and also supported by a better organic cash flow generation, the common equity tier 1 capital ratio reached 14.7% (Fig 2) and was 30 basis points above Wall Street consensus. The CET 1 was lifted by 25 basis points from France impairment reversal and in our estimates, we are still not implying the Canada transaction which is now expected to be completed in Q1 2024.

Fig 1

Fig 2

Conclusion and Valuation

In our previous publication, we reported the following:

1. A likely extra dividend. This was confirmed by the bank which remains committed to a $0.21 special dividend;
2. A likely share repurchase on Canada sales and HSBC now anticipated a buyback of $2 billion. In our estimates, the CET1 ratio impact is going to decrease by 25 basis points in Q2 2023;
3. A positive outlook for 2023. The fiscal year 2023 NII guidance was unchanged when recomputed for IFRS 17 and is set at >$34 billion.

While net interest income was only a 1% beat, we view positively HSBC's better trading revenues and lower costs. The company recorded lower loan loss provisions and the indicated buyback was higher than we anticipated. Despite that, we continue to believe that other banks have better upside both in terms of TBV valuation and yield. The France reverse impairment was a negative note that cannot go unnoticed. Show Me The Story initial concern is still valid. Last time we slightly increased the company's valuation and today, we reiterated our neutral view continuing to prefer ISP , BNP , UniCredit , and SocGen .

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