HSBC had its good name dragged through the mud in the wake of the Swiss tax evasion scandal that broke recently. The London-listed bank was already under pressure from rising costs, lower trading income and legal costs, and now the investigation into the bank’s Swiss operation has delivered a fresh blow.
HSBC has been busy beefing up its compliance department, and it now accounts for 10% of the workforce. The decision to tighten up rules and regulations was driven by a number of issues which still hang over the bank, such the mis-selling of PPI, LIBOR fixing and money laundering fines in the US. The ramp of hiring for compliance has pushed up operating costs, and all the while the finance house is setting money aside for fines. In the third-quarter update the bank resigned itself to missing the cost to income ratio target it set out for 2016. Revenue is broadly unchanged as low volatility in the financial markets and the slowdown in China is leading to lower growth prospects.
The Swiss tax evasion scandal is yet to fully unravel for HSBC, but UBS were involved in something similar and the bank faces fines of up to $6.3 million. Traders will be paying close attention to any statement in relation to the Swiss investigation.
On a positive note, even though the bank has major exposure to the Far East and in particular China, it hasn’t endured write-downs on property loans unlike Standard Chartered, but the declining economic growth in China will eventually catch up with the company. HSBC is Europe’s largest bank by market capitalisation, and its secure capital structure ensured it passed the Bank of England’s stress test easily.
The consensus is for revenue of $63.09 billion and net adjusted profits of $16.77 billion when HSBC reveals its full-year figures.These forecasts equate to a 2% drop in revenue and a 3% decline in adjusted net income. The bank will also report its second-half numbers on the same date and the market is expecting revenue and adjusted net income of $31.05 billion and $7.33 billion respectively. These compare with the first-half revenue of $31.16 billion and adjusted net income of $9.96 billion.
Equity analysts are bullish on HSBC, and out of the 42 recommendations, 17 are buys, 17 are holds, and eight are sells. The average target price is £6.69, which is 11% above the current price. Investment banks hold a moderately bullish view on Standard Chartered, and out of the 38 ratings, 12 are buys, 16 are holds, and 10 are sells. The average target price is £10.03, which is 4.5% above the current price.
The 200-hour moving average at £6.23 is acting as resistance and if this level is held it will bring the downside support at £5.90 into play. The next will to watch will be £5.70. A move above the 200-H MA will make £6.40 the initial target, and then the 100-week MA at £6.53 will be in sight.