The second-largest economy in the world is coming off the boil with the violent swings experienced by the China 300 between June and July indicating a further cooling in the country’s growth. It’s no longer developing at double-digit rates, and the excessive credit-funded construction projects in China are bringing back memories of Spain and Ireland pre-2007.
The Chinese authorities have been trying their best to hold off the stampede into deeper bear market territory in the China 300, but investor confidence is proving difficult to win back.
Beijing is trying to project an image of strength and confidence in the domestic stock market, but interest rate cuts, the announcement of yet more infrastructure projects, and liquidity injections have still to restore stability. Both Standard Chartered and HSBC benefitted greatly when China was booming, and now that the outlook is very different, the banks could be in for large write downs last seen during the credit crisis.
London-listed banks like Barclays, Lloyds, and RBS are now starting to show turnarounds in their balance sheets and loan books, while HSBC and Standard Chartered may be drifting into dangerous waters.
The bank eked out a 4% rise in first-quarter profits, and solid earnings from the investment banking division were a contributor. The bank has been trimming its exposure to the financial markets over the past few years for risk management purposes, as is common among the sector, but market volatility helped the firm post a small increase in profits. As I previously stated, the company is spinning off non-core assets and ramping up the headcount in its compliance department. The Swiss tax scandal had little financial impact, but its reputation has taken a bruising, and the CEO Stuart Gulliver is worried about the long-term damage to the brand.
The British bank levy cost HSBC £750 million last year, and it was the largest amount paid to the Treasury by a UK-based bank. It was no surprise HSBC is now contemplating moving its headquarters out of the UK. The company stated it’ll make its decision before the end of 2015, and any relocation would be completed by 2017. The UK is a tougher place to do business in the wake of the banking crisis, and HSBC is considering going back to its Asian roots to avoid heavy regulation and broaden the scope for profit making.
HSBC will announce its first-half numbers on 3 August, and the market is expecting revenue of $30.56 billion and adjusted net income of $8.3 billion. The bank will reveal its full-year numbers in February 2016, and dealers are anticipating revenue of $61.29 billion and adjusted net income of $16.44. These forecasts represent a marginal increase in both revenue and adjusted net income.
Equity analysts are bullish on HSBC, and out of the 40 ratings, 13 are buys, 20 are holds, and seven are sells. The average target price is £6.37, which is 13% above the current price.
HSBC shares have been trading lower since August 2013, and £5.55 is the initial target, and a move through it will bring the support at £5 into sight. Any moves higher will encounter resistance at £6 and £6.25.