HSBC shares are at their lowest level in over a decade. They fell 4 per cent on Monday morning following second-quarter numbers from the Asia-focused lender. Chief executive Noel Quinn will accelerate a restructuring. That will not be enough to put a floor under the stock.
Net income dropped 96 per cent to $192m for the quarter, missing expectations. North America and Europe weighed on earnings with the latter’s losses widening almost six-fold to more than $3bn in the first half. Provisions for the group’s potential loan losses rose nearly seven-fold to $3.8bn.
Mr Quinn has showed greater steel than predecessor John Flint, cutting costs by 7 per cent in the quarter. Deposits grew. The bank’s long-run tilt into China is producing results. Asia — which accounted for nearly half of investment banking business revenues — offset weakness in other markets.
Due to coronavirus, expected loan losses for 2020 could be as high as $13bn — more than four times last year. A repeat of credit market conditions that more than doubled bond trading fees in the second quarter is unlikely. HSBC’s balance sheet has a healthy common equity tier-one ratio of 15 per cent. But this is likely to drop once regulators in the UK, where HSBC is based, permit dividends again.
Politics still generates the biggest uncertainties. HSBC’s support for China’s repressive Hong Kong security law is making it unpopular with clients in the west. HSBC has been struggling to convince Beijing it was not responsible for the arrest of Huawei’s finance director.
The shares still trade at a 45 per cent premium to peer Standard Chartered, another supporter of the security law, on a price-to-book value basis. Much of that headroom is the result of Chinese growth potential. But as the two world economies centred on the US and China grind apart, HSBC’s position is becoming precarious. Standard Chartered, which is lower-profile and more diversified, now looks like the better option for investors.
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