HSBC Stock Has Limited Upside

[Updated 06/03/2021] HSBC Valuation Update

HSBC stock (NYSE: HSBC) has gained around 24% YTD, increasing from about $26 at the beginning of 2021 to around $32 currently. Trefis estimates HSBC’s valuation to be around $33 per share – 4% above the current market price. The growth in 2021 was in line with the rally seen in U.S. bank stocks, which benefited from the approval of the stimulus package, a fast-paced Covid-19 vaccination drive, and the Fed’s decision to maintain near-zero rates.

HSBC outperformed the consensus estimates of revenues and earnings in its recently released first-quarter FY2021 results. It reported total revenues of $13 billion – down 5% y-o-y, mainly due to a 14% decline in the net interest income (NII). The NII suffered due to a lower interest rate environment – net interest margin (NIM) decreased from 1.54% in Q1 2020 to 1.21% in the quarter, partially offset by higher interest-bearing assets. On the flip side, the global banking and markets (GBM) reported a 7% y-o-y growth mainly driven by higher investment banking and equities trading revenues. Additionally, the bank’s adjusted net income figure of $3.9 billion increased 117% y-o-y, mainly due to a significant drop in provisions for credit losses – from $3 billion to -$435 million.

The bank reported $50.43 billion in revenues for the full year 2020, which is 10% below the year-ago period. This was driven by a 14% y-o-y drop in the retail banking & wealth management segment, followed by a 13% decrease in the commercial banking division. The decline was mainly due to the interest rate headwinds, which negatively impacted the net interest income. While the core banking revenues decreased in the year, growth in sales & trading business was able to partially offset the weakness in other segments. That said, we expect the core banking revenues to see stagnant growth in FY2021, due to the impact of lower rates, which are unlikely to see a swift revival to the pre-Covid-19 levels. Further, the sales & trading revenues are likely to normalize with recovery in the economy. Overall, the above factors will likely restrict HSBC’s revenues to $51 billion in FY2021. 

Additionally, the bank increased its provisions for credit losses from $2.8 billion to $8.8 billion in 2020, to compensate for the higher risk of loan defaults. This weighed on the adjusted net income of the bank, reducing it by 35% y-o-y to $3.9 billion. The provision figure has decreased over the recent quarters, signaling some recovery in the loan repayment capability of its customers. Further, we expect it to see a favorable decline over the subsequent months, boosting HSBC’s profitability figures. This will likely result in an EPS of $1.96, which coupled with a P/E multiple of close to 17x, will lead to the valuation of $33.

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

HSBC stock (NYSE: HSBC) has lost close to 35% since the start of 2020 and is down 8% since the March 23 lows. Trefis estimates HSBC’s valuation to be around $25 per share – slightly below the current market price. HSBC, one of the largest banking and financial services organizations in the world, with a sizable loan portfolio of around $395 billion in retail banking loans and $346 billion in commercial loans (as per 2019 data), is very sensitive to changes in interest rates. In the 2020 third-quarter results, HSBC posted revenues of $11.9 billion – 11% lower than the year-ago period, mainly driven by a 15% y-o-y drop-in net interest income, partially offset by growth in trading revenues. Further, its net interest income for the cumulative nine months is down by 8% y-o-y.

We expect HSBC’s revenues to remain around $51.6 billion for full FY 2020 – 8% below the year-ago figure, mainly due to the lower interest rate environment. Further, its net income margin is likely to drop from 10.6% in 2019 to 8.6% in the current year due to significant build-up in provisions for credit losses, reducing the EPS figure to $1.10 for FY 2020. Thereafter, revenues are expected to marginally increase to $51.9 billion in FY2021, mainly due to some growth in retail and the commercial banking businesses. Further, the net income margin is likely to improve to 14.7% due to a favorable drop in provision for credit losses. This is likely to improve the EPS figure to $1.89, which coupled with the P/E multiple of around 13x will lead to a valuation of $25.

[Updated 08/31/2020] HSBC Looks Undervalued As Asian Economy Gets Back On Track

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

There are a couple of reasons for this:  The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could negatively affect businesses and individuals, impacting their loan repayment capability and exposing HSBC to sizable loan losses. Moreover, geopolitical uncertainty due to heightened tension between the US and China continue to adversely impact the bank’s performance.

But does it mean HSBC stock is undervalued? Sure, it does.  Trefis estimates HSBC’s valuation to be around $26 per share – about 20% above the current market price – based on an upcoming trigger explained below and one risk factor.

The trigger is an improved trajectory for HSBC’s revenues over the second half of the year. We expect the company to report $52.5 billion in revenues for 2020 – lower than the figure for 2019. Our forecast stems from the belief that as economic conditions have started to recover in Q3, the bank’s performance will steadily improve. Further, the easing of lockdown restrictions in most of the world is likely to help consumer demand, benefiting the overall business scenario. Moreover, HSBC’s Asia banking business has remained robust, with the bank reporting a profit of more than $7.3 billion in YTD 2020. The bank’s investment banking operations have driven positive revenue growth in Q1 and Q2 due to higher trading volumes, with the bank’s trading revenues surging by 35% in the first half of 2020 as compared to the year-ago period. On similar lines, HSBC’s advisory and underwriting fees saw significant growth in the first half of 2020 due to a jump in debt underwriting deals after the Fed stimulus. This has partially offset the impact of weak revenues in other segments. While we expect the trading income to drop in the subsequent quarters, it is likely to be still higher than the year-ago period. Overall, we see the bank reporting an EPS in the range of $1.02 for FY2020.

Thereafter, HSBC’s revenues are expected to improve to $53.7 billion in FY2021, due to an increase in retail revenues, partially offset by a decline in sales & trading revenues. Further, the net income margin is likely to grow as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $1.91 for FY2021.

Finally, how much should the market pay per dollar of HSBC’s earnings? Well, to earn close to $1.91 per year from a bank, you’d have to deposit about $191 in a savings account today, so about 100x the desired earnings. At HSBC’s current share price of roughly $22, we are talking about a P/E multiple of 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 near-term prospects are less than rosy. What’s behind that?

HSBC has a huge portfolio of consumer, commercial, and wealth management loans – more than $1 trillion in FY 2019. The economic downturn could deteriorate the loan repayment capability of its consumers, exposing the bank to significant loan defaults. In anticipation of this risk, HSBC has increased its provisions for loan losses from around $1.1 billion in the first half of 2019 to $6.9 billion so far – a 6x jump. If the economic condition worsens, this figure could further increase in the subsequent months. Further, a negative economic outlook will make it expensive for the bank to attract funding, increasing the cost of its operations. To sum things up, we believe that HSBC’s stock is currently undervalued and offers upside, given its strong retail and investment banking operations.

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