HSBC premium looks shaky

Last August, the bank announced a painful restructuring, the details of which were outlined in February. Although this shake-up is probably necessary, we think the shares premium rating among the big UK-listed lenders leaves little room for execution risk, in what looks like an increasingly challenging backdrop.

The scale of the repair job is enormous. HSBC wants to reduce risk-weighted assets by $100bn by the end of 2022, and redeploy capital from underperforming investment banking teams in Europe and the US to higher-growth regions, including Asia and Mexico. This, alongside cuts to US retail operations, European sales and trading, and a merger of the group’s global private banking and retail divisions, will result in around 35,000 job losses, and a bill of $6bn, 90 per cent of which will be booked this year and next.

The good news is that this could yield cumulative savings of $4.5bn a year from 2022. The bad news is that the overhaul makes for a very uncertain outlook at a time when fears are mounting about about the economic impact of the coronavirus outbreak. For a start, while HSBC’s plan expects global growth of 2.68 per cent this year, the OECD this week suggested global growth could nearly halve from its previous forecast, to 1.5 per cent. Indeed, the bank acknowledges that the potential impact of the coronavirus does not feature in its plan, while initial estimates that virus-linked loan impairments could reach $600m already look optimistic.

Of equal importance is the bank’s expectations for the US Federal funds rate – higher rates tend to mean more profitable lending. HSBC expects rates this year to decline to between 1.25 and 1.5 per cent, but rates are already at 1-1.25 per cent after this week’s cut. Looser monetary policy this year sets the ground for even tighter lending conditions for the bank. As analysts at Berenberg argue, HSBC’s past growth has tended to rely on higher rates.

It also places higher emphasis on income growth in Asia, despite management assertions as recently as October that the bank would “struggle to reinvest [$10bn] of capital organically pretty quickly”. Two notable constraints are its ability to fund loan growth with deposits and train relationship managers fast enough.

None of the above might feel quite as uncertain if HSBC’s own leadership wasn’t a source of continual debate. Unfortunately, chairman Mark Tucker is yet to pick a full-time successor to Mr Flint, seven months after firing him, leaving investors to assume that there are doubts over interim chief executive Noel Quinn. But it is even harder to swallow the idea of an external candidate joining now, just weeks into a multi-year overhaul of the sprawling lender.