HSBCs China tie set to drag the shares further

HSBC’s best conditions for cost cutting may now have passed.

HSBC shares have dropped as much as 4.6% on Tuesday, the most in almost two-years to the day, echoing the market’s reaction to disappointing full-year earnings report in 2017. Then as now, unsatisfactory cost results were partly to blame. Naturally, investors are looking across the sector too, with shares in more ‘locally’ focused rivals Lloyds and closer peer, Barclays both losing traction and Europe’s broadest bank sector index also underperforming.

It’s difficult to read the bank’s comments accompanying lower than forecast underlying income of $19.9bn as a wake-up call. Recent quarterly reports from continental lenders have been patchy at best whilst China’s economic counters have been deteriorating for over a year. But the sector chill is palpable enough given HSBC’s unique insights into challenges for European lenders in the world’s second-largest economy. “China remains subject to domestic and external pressures” said HSBC’s chairman, though he added “we expect it to maintain strong growth”.

Elsewhere, the group’s CEO pledged a “proactive” approach to costs and investments, whilst drawing the line at ‘harmful’ “short-term” decisions. It’s a signal that the best conditions for expenditure may now have passed, after reported operating expenses fell 1% to $34.7bn, but "mainly" due to lack of "costs to achieve expenditure in 2017". In other words, the absence of weighty expenses was a discrete advantage in 2018. With profits adjusted for further one-offs, including FX, rising just 3% and below forecast on all basis, CEO John Flint’s goal of getting cost growth to below underlying earnings growth looks set to remain elusive.

In 2018 at least, any negative impact on attributable capital was contained. Dividends were largely in line with expectations. But the core capital ratio retreated 50 basis points to 14%, calling the rate at which HSBC pay outs have accelerated over the last few years (including buybacks) into question. This thinking helps explain why HSBC stock is lagging more domestically focused large rivals so far year, trading down about 2% since the end of December. That compares with a rise of 12% by Lloyds and RBS’s 17% gain. After all, EPS growth at Europe’s largest bank has latterly been projected to be 11.4 times the value its shares, well above most of the competition. HSBC stock could struggle to ditch a negative bias anytime soon.

Normalised share price chart [19/02/2019 15:10]

Source: Refinitiv/City Index

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