HSBC a drag as banking rally splutters
HSBC’s weaker-than-expected results acted as a drag on the FTSE 100. With an index weighting of 7.5% its slide is contributing virtually all of today’s fall. HSBC, which is one of the big dollar earners on the index, has enjoyed an incredible post-Brexit rally but this is coming undone at last. But weaker earnings and a steadier pound means the stock may have peaked for the moment.
The stock fell 6% in London after being sold-off overnight in Hong Kong. At the start of bank earnings season, it’s not a great start for financials and it’s helped send Lloyds, Barclays and RBS lower today on expectations that they too will report earnings below forecasts. We’re shaping up for better news from Lloyds, but RBS is unlikely to deliver anything terribly positive. The rally in UK banking stocks since Brexit may be coming to an end.
Profits were down 62%, which the bank said was largely due to a lot of one-off items. But it was also down to a significant drop in revenues, which were 5% below consensus estimates. Trading revenues were noticeably lower while loan growth improved, including in the UK.
Despite the headline fall in profits, there was some good stuff in there.
Net interest margin was squeezed throughout 2016 but exposure to tightening US interest rates should support HSBC going forward into 2017.
Cost-saving initiatives — all those branch closures and job cuts — are working. Generated annualised run rate savings of $3.7bn, with adjusted operating expenses declining by $1.2bn or 4%.
Common equity tier 1 capital ratio increased to 13.6%, which is nicely up from 11.9% a year before, but down from 13.9% at the end of Q3 2016.
Currency and interest rate headwinds were flagged, including lower UK interest rates hitting revenues by about $300m and a $2bn knock from restating revenues based on Jan 2017 exchange rates.
The stock has rallied so much that today’s drop seems justified based on the weaker-than-expected revenues and profits. In spite of the plunge it’s still trading at its best in more than 3 years and is up more than 50% from its post-Brexit low. But all the dollar-earning upside may have been baked into the stock price already and with the pound now pretty steady, the free ride for HSBC’s shares looks over.
Senior Market Analyst