HSBC stock has limited upside

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[Updated 06/04/2021] Update of the HSBC rating

HSBC share (NYSE: HSBC) is up around 24% year-over-year, rising from around $ 26 at the beginning of 2021 to around $ 32 today. Trefis estimates Rating by HSBC around $ 33 per share – 4% above current market price. Growth in 2021 was in line with the rally in US bank stocks, which benefited from the approval of the stimulus package, a rapid Covid-19 vaccination campaign, and the Fed’s decision to keep interest rates near zero.

HSBC exceeded consensus revenue and earnings estimates in its recently released results for the first quarter of FY 2021. It posted total revenue of $ 13 billion – a 5% year-over-year decrease, largely due to a 14% decrease in net interest income . The NII suffered from a lower interest rate environment – the net interest margin fell from 1.54% in Q1 2020 to 1.21% in the quarter, partly offset by higher interest-bearing assets. On the flip side, global banks and markets saw 7% year-over-year growth, largely driven by higher income from investment banking and stock trading. In addition, the bank’s adjusted net income increased 117% year over year from $ 3.9 billion, mainly due to a significant decrease in loan loss provisions – from $ 3 billion to $ -435 million.

The bank had revenues of $ 50.43 billion for the full year 2020, down 10% from the same period last year. This was due to a year-over-year decrease of 14% in the Retail Banking & Wealth Management segment, followed by a decrease of 13% in the Commercial Banking area. The decline was mainly due to the interest headwinds, which had a negative impact on net interest income. While core banking income declined over the course of the year, growth in the sales & trading business partially offset the weakness in other segments. However, we expect core banking revenues to stagnate in FY2021 due to the impact of lower interest rates as it is unlikely to hit pre-Covid-19 levels anytime soon. In addition, sales and trade revenues should normalize as the economy recovers. Overall, the above factors are likely to be limiting HSBC revenue to $ 51 billion in FY2021.

In addition, the bank increased its provision for loan losses from $ 2.8 billion to $ 8.8 billion in 2020 to offset the increased risk of loan defaults. This weighed on the bank’s adjusted net income, reducing it 35% year over year to $ 3.9 billion. Provisions have decreased in recent quarters, suggesting some recovery in its customers’ loan repayment ability. Additionally, we expect a favorable decline in the months ahead that will boost HSBC’s profitability numbers. This will likely result in an EPS of $ 1.96 which, when combined with a P / E ratio of nearly 17x, will result in a valuation of $ 33.

[Updated 01/05/2021] Is HSBC stock still undervalued?

HSBC share (NYSE: HSBC) has lost nearly 35% since early 2020 and is down 8% since the March 23 lows. Trefis estimates Rating by HSBC are around $ 25 per share – a little below current market price. HSBC, one of the largest banking and financial services companies in the world, with a sizeable loan portfolio of around $ 395 billion in retail loans and $ 346 billion in commercial loans (based on 2019 data), is very sensitive to changes in interest rates. In Q3 2020 results, HSBC recorded revenue of $ 11.9 billion – 11% less than the year-ago period, largely due to a 15% year-over-year decrease in net interest income, which was partially offset by growth in trading income. In addition, net interest income for the nine-month cumulative decreased 8% year over year.

We expect HSBC revenue remain at around $ 51.6 billion for the full 2020 fiscal year – 8% below the prior-year figure, mainly due to the lower interest rate environment. Additionally, the net income margin is likely to decrease from 10.6% in 2019 to 8.6% this year as loan loss provisions increase significantly, reducing earnings per share to $ 1.10 for FY2020, slightly on $ 51.9 billion up in FY2021, mainly due to some growth in retail and commercial banking. In addition, the net profit margin should improve to 14.7% due to a favorable decline in loan loss provisions. This should improve earnings per share to $ 1.89 which, when combined with the P / E of about 13x, will result in a valuation of $ 25.

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

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

There are several reasons for this: The Covid-19 outbreak and economic slowdown have caused market expectations for 2020 and short-term consumer demand to collapse. This could adversely affect businesses and individuals, affect their ability to repay loans, and expose HSBC to significant credit losses. In addition, geopolitical uncertainty due to heightened tensions between the US and China continues to affect the bank’s performance.

But does that mean HSBC stock is undervalued? Sure it does. Trefis estimates Rating by HSBC to about $ 26 per share – about 20% above current market price – based on an impending trigger and risk factor discussed below.

The trigger is an improved trajectory for HSBC revenue in the second half of the year. We expect the company to post revenue of $ 52.5 billion in 2020, less than 2019. Our forecast is based on the belief that the bank’s performance will improve as economic conditions begin to recover in the third Quarter will improve steadily. Additionally, easing lockdown restrictions in most parts of the world is likely to support consumer demand and benefit the overall business case. In addition, HSBC’s Asian banking business remained robust, with the bank generating more than 7.3 billion in profit in the first half of 2020 up 35% year-over-year. Similarly, HSBC’s advisory and underwriting fees saw significant growth in the first half of 2020 due to a surge in borrowing business following the Fed’s incentives. This partially offset the effects of weak sales in other segments. For the following quarters we expect a decline in trading income, but it should still be higher than in the same period of the previous year. Overall, we see the bank reporting earnings per share in the range of $ 1.02 for fiscal 2020.

Thereafter, HSBC’s revenue is expected to improve to $ 53.7 billion in fiscal 2021, driven by an increase in retail sales that is partially offset by a decline in sales and commerce. Additionally, net profit margin is likely to increase year over year due to a decrease in loan loss provisions, resulting in an EPS of $ 1.91 for FY2021.

After all, how much should the market be paying for every dollar of earnings from HSBC? Well, to make nearly $ 1.91 a year from a bank, you’d need to deposit about $ 191 into a savings account today, which is about 100 times the income you want. At HSBC’s current share price of around $ 22, we’re talking about a P / E of just under 12x. And we think a number closer to 13.5x will be appropriate.

That said, banking is a risky business right now. Growth looks less promising and the near-term outlook is far from bright. What’s behind it?

HSBC has a huge portfolio of consumer, commercial and asset management loans – more than $ 1 trillion in fiscal 2019. The economic downturn could worsen consumer credit repayment ability and expose the bank to significant loan defaults. In anticipation of this risk, HSBC increased its loan loss provisions from around $ 1.1 billion in the first half of 2019 to $ 6.9 billion so far – a six-fold jump. Should the economic situation worsen, this value could increase further in the following months. In addition, the negative economic outlook makes it expensive for the bank to attract funding, which increases operating costs. In summary, we believe that HSBC’s stock is currently undervalued and has upside potential given its strong retail and investment banking activities.

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