HSBC is the largest bank in Europe by market capitalisation; it reported a 12% decline in first-half profits in August. The bank blamed a poor first quarter for the disappointing six-month figures, although the second quarter showed signs of improvement. Although HSBC is the largest bank in Europe by market capitalisation, it experiences many of same issues the entire sector does such as tougher regulation, less volatile financial markets and fines due to misconduct.
HSBC earns two thirds of its profits in Asia and the first-half profits for the region were down by 15%. The slowdown in China is evident, and in addition its business in Hong Kong was disrupted during the protests. The bank’s capital markets unit registered a 12% decline in earnings, but the drop is relatively small when compared with other banks’ decline in trading income, and HSBC isn’t as dependent on its investment banking arm unlike Barclays. In the first-half of the year the bank put aside £146 million for ‘customer redress’, which covers provisions such as the mis-selling of PPI. HSBC’s amount paid out for client compensation was a 43% drop on last year’s figure.
HSBC comfortably passed the European Banking Authority stress test last weekend but the bank’s capital structure was never called into question. However, the tougher Bank of England stress test in December may send a shock wave through the UK banking sector, as Lloyds and RBS marginally passed the less difficult European examination. Any impact on HSBC’s share price due to the British stress test is likely to be small in comparison to that of the bailed banks.
Out of the big five UK headquartered banks, HSBC has most in common with Standard Chartered which also has a large exposure to Asia. During the week, Standard Chartered issued its second profit warning in four months which sent its shares to a five-year low. The two banks have similarities and one of those is that each of its Asian business is struggling.
Equity analysts are bullish on HSBC. Out of the 43 ratings, 20 are buys, 16 are hold and seven are sells, with the average target price being £6.82. Out of the big five British banks HSBC ranks middle in terms of positive outlook from equity analysts. Standard Chartered has a higher percentage of sells note attached to it.
The consensus is for third-quarter revenue of £9.62 billion and net income of £2.74 billion.
The share price has been in decline since May 2013, and during the Hong Kong protests the stock fell to £6.09. There has been small recovery but nothing substantial, while an underwhelming outlook for the full-year could see the stock back to £6.09, and the next level down is £5.90. If the gap in September at £6.50 is filled, then the 2014 high of £6.83 will be the next target.