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HSBC warns of challenging US-China relations

The Asia-focused lender reported impairments more than $1bn higher than analysts had expected
August 3, 2020

HSBC (HSBA) increased impairments for bad loans to $6.9bn (£5.2bn) in its first half, more than $1bn higher than consensus estimates, which drove pre-tax profits down almost two-thirds. Depending on the scale of economic destruction, the lender expects those provisions to rise by anywhere between $1.1bn and $6.1bn during the remainder of the year.

IC TIP: Hold at 327p

Pandemic aside, with Asia accounting for almost two-thirds of net operating income, the group’s fortunes are also vulnerable to a continued deterioration in relations between China and the west, specifically the US and the UK. Chief executive Noel Quinn warned that ongoing tensions between the US and China would “create challenging situations” in the second half. 

Like its peers, the lender’s income was hurt by the reduction in interest rates by central banks, which led to an 18 basis point decline in the net interest margin to 1.43 per cent, and offset a second-quarter jump in global markets revenue. Lending also declined by $18bn as customers that drew on credit facilities in the immediate aftermath of the Covid-19 outbreak then paid down these borrowing lines. 

Unsurprisingly, management intends to accelerate the transformation programme announced in February, which includes 35,000 redundancies. Some progress was made during the first half, including a $21bn reduction in risk-weighted assets in global banking and markets, against a target of $100bn. However, management expects changes in credit ratings attached to its loans to result in mid-to-high single-digit percentage growth in risk-weighted assets over the full year. That is expected to have an adverse impact on the common equity tier one (CET1)  ratio, which rose above management’s target to 15 per cent following the withdrawal of the final dividend. 

Investec forecasts adjusted tangible net assets of 744¢ a share at the end of December, rising to 763¢ the same time in 2021. 

HSBC HOLDINGS (HSBA)   
ORD PRICE:327pMARKET VALUE:£ 66.6bn
TOUCH:326.3-327p12-MONTH HIGH:648pLOW: 324p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:918¢LEVERAGE:17.3
Half-year to 30 JunTotal operating income ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201938.012.44231.0
202031.14.310nil
% change-18-65-76-
Ex-div:na   
Payment:na   
£1=$1.29