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HSBC update Sept. 28 th, 2020  

 

HSBC is one of the biggest banks in the world with a market capitalization of about 140 bn$ before corona. It makes business in 5 continents. It is present in retail banking, commercial banking and global banking with about the same share of each division in EBT. 

The good news for HSBC in the corona panic is that nearly all asian countries -HSBC markets - try hard to bring their economies back to normal. Banks in Europe and parts of North America are hit harder.

The bad news is that HSBC suspends its dividends and share buybacks.

Another bad news is that expected credit losses (ECL) might increase to 8 - 13 bn$. It seems not very likely that HSBC will be profitable in 2020. Europe keeps its economies by far longer locked down as the Asian countries. The biggest challenge is the british portfolio. 

The bank sits with its western seat and its dominant HK/China business vs. weak international business between the chairs of China that put it probably on the "unreliable entity list"(14) and as well the USA and UK. As its most profitable business is situated in HK & China it seems to make sense to take the chinese side. That might provoke sanctions from the west. In this sense the chinese insurer Ping An increased its share in HSBC to 8%(15). In the long run HSBC might become in the cold war US vs. China part of the chinese influence zone and a bridge head to the US influence zone. 

This is not a recommendation or proposal to do anything. The data written in this article is not guarranteed. It is my private personal opinion. I`m not independing as I own a position of HSBC shares. 

Opportunities & Risks

A dividend of 51c/share was already before the corona panic not sustainable and is deferred since. The bank urgently needs to fix its non profitable European business after surviving the corona panic.  

HSBC makes business in 5 continents. But 82% of its profits are generated in Asia 1/2 of that share in Hongkong. A new qualified management team that makes the business in Europe profitable could improve the profitability of the overall company significantly. On the other hand an economic downturn in greater China could vaporize HSBC profits. 

Due to its strong retail banking HSBC has a surplus in deposits. A potential increase in interest rates and the interest spread short term - long term can increase the profitability significantly. 

A huge risk is the HK property markets. HSBC is a gorilla in the HK banking. Using their IRB approach retail mortgages had before corona panic only a 0.7% probability of default and a few percent of loss given default which seems very low in face of the corona virus.  

The big risk is that during the last years plenty of imbalances built up in the world. Debt is very high in most of the established 1st world nations and increasing even faster. If this imbalances would offset it would hit nearly all investments including HSBC.  

Observations

Retail banking is the bank’s largest and most profitable business, the high profitability is due to the strong position in Hong Kong and less in the UK. HSBC’s long presence and reputation in Hong Kong gives the bank pricing power in this market.

Commercial banking esp. trade finance is HSBC’s original business, its second largest in terms of revenue but it is the biggest contributor of net income; it is highly profitable. HSBC offers several services for companies to make business abroad such as trade and receivables finance, credit and lending, cash management. The bank’s extensive network in many countries means that its business model is difficult to copy, resulting in an excellent position for its clients.

I had an HSBC account in the Middle East. I had the impression that the employees worked according to plenty of strict, static rules and regulations and had very small room for own decisions and initiatives. I appreciated it as it is in some countries a big fear is that the account fades away over night. In Europe with its qualified well paid employees such a bureaucracy is an efficient hurdle vs. success. 

It seems that HSBC waste a lot of its energy needed to turn around the European business and to avoid a downturn in face of the corona virus with left ideology as a gender  campaign and a task force on climate-related financial disclosures. 

Some Numbers

                                                            Q2/20       Q1/20          2019       2018           2017

Revenues bn$:                                        13.1         13.7            56.1          54              51.4

Net Profit att. bn$:                                    .62          1.8             5.7          12.6             9.7

EPS c/share:                                              3             7               30           63               48       

Dividend c/share:                                       0             0                51           51               51      

Shares* bn                                               20.2         20.2           20.3        20.1           20.1 

Tangible net asset/sh $:                            7.34         7.44           7.13        7.01            7.26      

Tier 1 capital ratio (%):                             15           14.6           14.7       14.0            14.5

Customer loans 06/30/20: 1021 bn$

Share price Aug. 3rd: 4.3$ 

*Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares. The share buyback program is suspended. The script dividend program and options inflates the number of shares. All in all the number of shares inflates slowly.

 

Some News

2020 Feb. 18 Due to substantial challenges in its key markets, HSBC is cutting 35,000 jobs from 235.000 and $100B in assets over the next three years, and will incur $7.2B of costs because of the restructuring. HSBC will also suspend buybacks for two years (but maintain its dividend) and close around a third of its 224 underperforming U.S. branches.

2019 Sept. 11 HSBC weighs selling its French money loosing retail bank business.  (7),(8)

2020 jan 11, HSBC is going HSBC Holdings Plc has kicked off the sale of its French retail operations, (11). This is more or less a surrender as HSBC does not see the option to make this business sufficiently profitable again. 

To main Page

(15) 2020, Sept. 28 https://seekingalpha.com/news/3617509-ping-insurance-modestly-adds-to-hsbc-stake-shares-up-7?utm_medium=email&utm_source=seeking_alpha&mail_subject=hsbc-ping-an-insurance-modestly-adds-to-hsbc-stake-shares-up-7&utm_campaign=rta-stock-news&utm_content=link-1

(14) 2020, Sept. 21st https://fortune.com/2020/09/21/hsbc-stock-shares-today-fincen-china/

(13) 2020, Aug. 3rd https://www.irishtimes.com/business/financial-services/hsbc-warns-loan-losses-could-hit-13bn-as-profit-plunges-65-1.4320524

(12) 2020, Feb 18 https://seekingalpha.com/news/3542526-major-overhaul-hsbc-results-in-35k-layoffs?utm_medium=email&utm_source=seeking_alpha&mail_subject=hsbc-major-overhaul-at-hsbc-results-in-35k-layoffs&utm_campaign=rta-stock-news&utm_content=link-1

(11) 2020, jan 11 https://www.bnnbloomberg.ca/hsbc-kicks-off-sale-process-for-french-retail-business-1.1372207

(10) 2020, jan 06 https://www.bnnbloomberg.ca/hsbc-walks-tricky-political-tightrope-between-hong-kong-and-beijing-1.1369442

(9) 2019, oct 28 https://seekingalpha.com/news/3510027-hsbc-abandons-rote-target-11-percent-shares-slump-3_8-percent

(8) 2019, oct. 16 https://www.reuters.com/article/us-hsbc-france-m-a-banks/hsbc-taps-lazard-to-sell-french-retail-business-source-idUSKBN1WU20U

(7) 2019 Sept. 11 https://seekingalpha.com/news/3498625-hsbc-weighs-sale-french-retail-bank-wsj?dr=1#email_link

(6) 2019 Aug 19 https://strategicmacro.blogspot.com/2019/08/hsbcs-exposure-to-hong-kong-real-estate_6.html?spref=tw

(5) 2019/Aug. 19 https://www.bloombergquint.com/global-economics/hsbc-gets-cold-shoulder-in-china

(4) 2019/June o3 http://www3.hkexnews.hk/listedco/listconews/sehk/2019/0603/ltn20190603091.pdf

(3) 2019/May 29 https://invezz.com/news/by_region/uk/hsbc-share-price-group-plans-to-boost-asia-retail-wealth-staff/

(2) 2019/May/3rd https://seekingalpha.com/article/4259506-hsbc-holdings-plc-2019-q1-results-earnings-call-slides

(1) 2019/jan/09 https://www.theguardian.com/business/2019/jan/08/uks-most-unequal-bank-hsbcs-gender-pay-gap-grows-to-61

2018/oct/29 https://www.blick.ch/news/wirtschaft/banken-asien-geschaeft-treibt-hsbc-weiter-an-gewinn-steigt-id9039267.html

https://seekingalpha.com/article/4202154-hsbcs-high-dividend-yield-opportunity

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