Analyst Note| Michael Wu, CAIA |
HSBC’s results were generally positive as lower-than-expected operating expense and ECL charge saw adjusted profit before tax at USD 4.7 billion and ahead of the bank’s published consensus estimate of USD 4.49 billion. Adjusted revenue was down 3% against the same period last year at USD 12.5 billion, largely in line with the consensus estimate of USD 12.7 billion. Our forecasts are adjusted to bring forward our net interest margin assumption in 2022 and 2023, offset by lower non-interest income. Our fair value estimates of HKD 75 per share, USD 48 per ADR, and GBX 483.25 are unchanged. While the result was generally positive in our view, the stock traded lower after the result as further share buybacks in 2022 are unlikely. The earlier announced USD 2 billion share buyback program was completed on April 20, and the additional USD 1 billion buyback announced at the full-year result is expected to start after the AGM on April 29, 2022. The bank’s capital position remains prudent, but its common equity Tier 1 of 14.1% at the end of the first quarter is guided to be below management’s target range of 14% to 14.5% due to the sale of the French retail business and an earlier acquisition. We expect profitability to lift the common equity Tier 1 ratio over our explicit forecast period, and there is no change in our view. Further capital management initiative is possible, but the time line is pushed back to 2023. The bank’s share price underperformed its U.K. peers in the recent weeks on the worsening coronavirus situation in mainland China. An improvement in the situation, likely in the second half of 2022, is a positive catalyst. An acceleration in the bank’s profitability improvement toward its target of 10% is another catalyst, though this may depend on the pace of its net interest margin improvement. We continue to forecast the bank to reach 10% by 2023.