- Reserve releases turbocharge the reported numbers
- Interest rate speculation is boosting the sector
In common with every other bank during the third quarter trading season, HSBC (HSBA) saw its reported pre-tax profits of $5.4bn (£3.9bn) boosted by a release of reserves put aside to cover bad debt provisions during the covid pandemic. The release added $700m to profits, reversing the $800m charge HSBC during the same period in 2020. The bank has roughly $1.2bn left of bad debt provisions that could potentially be reversed if economic conditions allow it. In addition, shareholders were cheered by the announcement of a $2bn share buyback scheme.
The impression remains that without the benefit from provisions, HSBC’s performance would be largely unremarkable – a fact borne out by the fact that quarterly revenues at its main business units were largely flat, while costs for the full-year are forecast to edge up to $32bn. HSBC, along with the rest of the banking sector, has re-rated steadily on the back of rising interest rate expectations, which if rates do rise, would relieve the pressure on banking margins considerably.
The point remains that the high street banks have underperformed the hybrid investment bank model that the likes of Barclays (BARC) have stuck to, often against intense regulatory pressure. On a pure valuation basis, HSBC is not expensive. It currently trades at a forward PE for 2023 of 8 times RBC Capital Markets’ estimates and has a price to NAV ratio of just 0.6. For comparison, a similar-sized US company like Bank of America (NYSE: BAC) has an NAV score of 1.5. The bigger questions for HSBC are still unresolved, a large litigation backlog and a pivot to Asia at a time when China is flexing its muscles. So, overall, the shares look priced to market. Hold at 439p.
Last IC view: Hold, 402p, 2 Aug 2021