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Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: <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> Q1 earnings release was one part theater, one part reality and in a large part more of the same. This may be a long and slow recovery and transformation for this institution. Time is not on its side from a debt rating perspective.With respect to reality, there is a glimmer of hope for revenues as HSBC reported an increase in the pipeline of loan applications.  As regards theater, HSBC’s loan loss reserve release appears to be largely signaling, rather than driven by an actual improvement in asset quality. Additional theater is provided in the way HSBC’s underlying profits are calculated.More of the same was seen in that HSBC cannot immediately escape its predicament of being a large conventional lender as opposed to a significant fee generating wealth and asset manager. This may be a long and slow recovery and transformation for this institution.Time is not on its side from a debt rating perspective. Moody’s review for a possible downgrade should be concluded before the end of Q2.  Notably, HSBC’s Additional Tier 1 (AT1) bonds are not at risk of a downgrade. They currently represent a safe harbor from downgrade risk and remain supported by a large buffer of capital. Most of these securities also trade at a meaningful discount, in spread and multiple terms, to the higher seniority Tier 2 securities.Concurrently, HSBC’s Tier 2 bonds trade extremely tight relative to the higher seniority Senior Unsecured bonds issued by HSBC Holdings.  For investors that cannot hold AT1 bonds, given the downgrade risk and the fact that there is little upside to be gained from owning HSBC’s Tier 2 bonds, our general preference would be to own HSBC’s holding company issued Senior Unsecured notes.

Executive Summary: HSBC Holdings' (HSBA LN) Q1 earnings release was one part theater, one part reality and in a large part more of the same. This may be a long and slow recovery and transformation for this institution. Time is not on its side from a debt rating perspective.With respect to reality, there is a glimmer of hope for revenues as HSBC reported an increase in the pipeline of loan applications.  As regards theater, HSBC’s loan loss reserve release appears to be largely signaling, rather than driven by an actual improvement in asset quality. Additional theater is provided in the way HSBC’s underlying profits are calculated.More of the same was seen in that HSBC cannot immediately escape its predicament of being a large conventional lender as opposed to a significant fee generating wealth and asset manager. This may be a long and slow recovery and transformation for this institution.Time is not on its side from a debt rating perspective. Moody’s review for a possible downgrade should be concluded before the end of Q2.  Notably, HSBC’s Additional Tier 1 (AT1) bonds are not at risk of a downgrade. They currently represent a safe harbor from downgrade risk and remain supported by a large buffer of capital. Most of these securities also trade at a meaningful discount, in spread and multiple terms, to the higher seniority Tier 2 securities.Concurrently, HSBC’s Tier 2 bonds trade extremely tight relative to the higher seniority Senior Unsecured bonds issued by HSBC Holdings.  For investors that cannot hold AT1 bonds, given the downgrade risk and the fact that there is little upside to be gained from owning HSBC’s Tier 2 bonds, our general preference would be to own HSBC’s holding company issued Senior Unsecured notes.

HSBC’s Q1 Results: One Part Theater and One Part Reality as We Move To a Downgrade