Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> results beat expectations, despite higher than anticipated credit costs. HSBC reported profits before tax of $1.4bn, down 58% year-over-year, excluding last years’ goodwill impairment. In addition, the firm managed to outline a major shift in balance sheet and income statement objectives without drawing undue attention to them. Nonetheless, the strategic update was more evolutionary than revolutionary. The share price jumped by over 6.5% in Hong Kong, but traded lower in London, following these revelations.Although the firm intends to distribute earnings as a dividend, it did not announce a share buy-back for 2021 and it may not undertake one next year either. Management stated that it targets a dividend payout ratio of 40% to 55% from 2022 and that it will reassess the buy-back issue when it determines that there is “excess capital’. We see this as a sign of confidence in the firm’s growth prospects that is balanced by a mature sense to retain capital for unexpected events and opportunities.These disclosures are largely credit positive. The higher-than-expected credit provisioning showcases a more conservative and realistic mindset than most competitors regarding the near-term impacts of the Covid-19 crisis. While we highlighted these provisioning needs, we honestly did not expect the bank to incur these costs. Please see <a href="https://www.smartkarma.com/insights/hsbc-capital-forbearance-and-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:47598" rel="noopener">HSBC: Capital, Forbearance and Covid-19 Sensitivity</a> for more details. In our view, the increased credit charges over increased shareholder distributions are a clear credit positive. Unfortunately, much of this is already priced into HSBC's credit securities.Strategically, another Asia-pivot was announced with an emphasis on Wealth and Personal Banking (WPB) activities, complemented by increased Commercial Banking and lower Global Banking and Markets (GMB) operations.Ostensibly this means that the firm seeks to operate with a lower level of liquidity while increasing the risk profile of the lending franchise. This will increase the firm’s beta to economic activity in China’s Greater Bay area while it reduces sensitivity to global market volatility. Provided the increased lending to the real economy is balanced with an increase in stable fee income from Wealth and Personal Banking, this may be credit neutral and shareholder positive. Lowering the weight of GBM relative to Commercial Banking in Asia without a commensurate increase in WPB would not be credit friendly. That is the execution risk going forward for credit investors. For now, we are prepared to give this management the benefit of the doubt due, in part, to the responsible way it recently increased provisions while controlling costs and shrinking the loan portfolio in 2020 through Q4.

HSBC Holdings' (HSBA LN) results beat expectations, despite higher than anticipated credit costs. HSBC reported profits before tax of $1.4bn, down 58% year-over-year, excluding last years’ goodwill impairment. In addition, the firm managed to outline a major shift in balance sheet and income statement objectives without drawing undue attention to them. Nonetheless, the strategic update was more evolutionary than revolutionary. The share price jumped by over 6.5% in Hong Kong, but traded lower in London, following these revelations.Although the firm intends to distribute earnings as a dividend, it did not announce a share buy-back for 2021 and it may not undertake one next year either. Management stated that it targets a dividend payout ratio of 40% to 55% from 2022 and that it will reassess the buy-back issue when it determines that there is “excess capital’. We see this as a sign of confidence in the firm’s growth prospects that is balanced by a mature sense to retain capital for unexpected events and opportunities.These disclosures are largely credit positive. The higher-than-expected credit provisioning showcases a more conservative and realistic mindset than most competitors regarding the near-term impacts of the Covid-19 crisis. While we highlighted these provisioning needs, we honestly did not expect the bank to incur these costs. Please see HSBC: Capital, Forbearance and Covid-19 Sensitivity for more details. In our view, the increased credit charges over increased shareholder distributions are a clear credit positive. Unfortunately, much of this is already priced into HSBC's credit securities.Strategically, another Asia-pivot was announced with an emphasis on Wealth and Personal Banking (WPB) activities, complemented by increased Commercial Banking and lower Global Banking and Markets (GMB) operations.Ostensibly this means that the firm seeks to operate with a lower level of liquidity while increasing the risk profile of the lending franchise. This will increase the firm’s beta to economic activity in China’s Greater Bay area while it reduces sensitivity to global market volatility. Provided the increased lending to the real economy is balanced with an increase in stable fee income from Wealth and Personal Banking, this may be credit neutral and shareholder positive. Lowering the weight of GBM relative to Commercial Banking in Asia without a commensurate increase in WPB would not be credit friendly. That is the execution risk going forward for credit investors. For now, we are prepared to give this management the benefit of the doubt due, in part, to the responsible way it recently increased provisions while controlling costs and shrinking the loan portfolio in 2020 through Q4.

HSBC Q4 ’20: Surprisingly Credit Positive Results and Strategic Update

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

Unlike may US and Asian banks, this UK and global bank was not able to see profit recovery and narrowing credit costs in the final quarter of the year. One may hard-pressed to find a comparable peer with a similar 54% decline in QoQ profit.

Unlike may US and Asian banks, this UK and global bank was not able to see profit recovery and narrowing credit costs in the final quarter of the year. One may hard-pressed to find a comparable peer with a similar 54% decline in QoQ profit. 

HSBC – Opposite Direction To Many Peers

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> and <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> bonds were among the few bonds that did not strengthen during the week. Meanwhile <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken's (SHBA SS)</a> 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. Yes Bank (YES IN) and Indiabulls Housing Finance (IHFL IN) bonds were among the few bonds that did not strengthen during the week. Meanwhile HSBC Holdings (HSBA LN) and Standard Chartered (STAN LN) are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, Svenska Handelsbanken's (SHBA SS) 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Gross Operating Revenues Do NOT Cover Recurring Costs At HSBCNA: HSBC Holdings plc’s (HSBC) [5.HK/HSBA.LN] US subsidiary, HSBC North America (US only) [HSBCNA], reported yet another troubling set of results for 4Q20, losing USD 152.6 mn – down USD 312.6 mn (195.4%) on a linked quarter basis. Excluding non-recurring items, core operating income declined USD 313.6 mn (230.1%) for a loss of USD 177.3 mn over the same period. As it stands again, HSBCNA’s operating costs exceed recurring revenues; *HSBCNA Is Evolving Into An Indian State Bank: Given the credit weakness, we find that NPL/TL and problem assets/TL ratios significantly worsened 92 bp and 160 bp linked quarter, respectively, to 2.82% and 5.01%. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis; and*HSBCNA Should Be Dumped At Any Price: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. We look forward to Group results on February 23rd, and the clarity we will receive on its hot mess in the US.

*Gross Operating Revenues Do NOT Cover Recurring Costs At HSBCNA: HSBC Holdings plc’s (HSBC) [5.HK/HSBA.LN] US subsidiary, HSBC North America (US only) [HSBCNA], reported yet another troubling set of results for 4Q20, losing USD 152.6 mn – down USD 312.6 mn (195.4%) on a linked quarter basis. Excluding non-recurring items, core operating income declined USD 313.6 mn (230.1%) for a loss of USD 177.3 mn over the same period. As it stands again, HSBCNA’s operating costs exceed recurring revenues; *HSBCNA Is Evolving Into An Indian State Bank: Given the credit weakness, we find that NPL/TL and problem assets/TL ratios significantly worsened 92 bp and 160 bp linked quarter, respectively, to 2.82% and 5.01%. By our calculation, we note that net new problem loan growth is a scary USD 867.9 mn  - for an annualized rate of growth of 155.4% - in line with the Indian state banks. By our calculation, HSBCNA’s reserves are light by USD 3.8 bn or 17.6% of HSBCNA’s stated equity. We would have compared the reserve shortfall to PBT, but HSBCNA simply loses money on an operating basis; and*HSBCNA Should Be Dumped At Any Price: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. We look forward to Group results on February 23rd, and the clarity we will receive on its hot mess in the US.     

HSBC Holdings Plc –American Result Intimates Group Miss

We have seen strong economic recovery. The beginning of lower credit costs is here, which should continue. Next to follow should be higher dividends, for most. We wonder if HSBC will not be one of these banks?

We have seen strong economic recovery. The beginning of lower credit costs is here, which should continue. Next to follow should be higher dividends, for most. We wonder if HSBC will not be one of these banks?

United Kingdom

HSBC Holdings plc is the holding company for the HSBC Group. The Company provides a variety of international banking and financial services, including retail and corporate banking, trade, trusteeship, securities, custody, capital markets, treasury, private and investment banking, and insurance.  The Group operates worldwide.

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HSBC Holdings (HSBA LN)

HSBC Q4 ’20: Surprisingly Credit Positive Results and Strategic Update

HSBC announced a major shift in objectives without drawing undue attention. It seeks to operate at a lower liquidity level and a higher beta to...

Hank Calenti, CFA

HSBC – Opposite Direction To Many Peers

Significantly higher credit costs, far higher operating costs and sharply lower profit in the quarter. Not similar to many peer banks.

Daniel Tabbush

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA

HSBC Holdings Plc –American Result Intimates Group Miss

HSBC HOLDINGS PLC: HSBCNA reported troubling results in 4Q20 - declining 195% linked quarter, as operating costs exceed recurring revenues. This...

Thomas J. Monaco

Banks – Reinstating Dividends

We have seen strong economic recovery. The beginning of lower credit costs is here, which should continue. Next to follow should be higher...

Daniel Tabbush

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