So far, 2016 has been a rough year for HSBC (LSE: HSBA). Concerns about the bank’s exposure to China, the sustainability of its dividend and falling profits have all weighed on HSBC’s share price. Year-to-date, HSBC’s shares have declined 14.8%, excluding dividends, underperforming the FTSE 100 by around 12%.
But after that start to the year, what’s next for the bank?
Same old, same old
Well, it looks as if it could be more of the same as HSBC’s fortunes are in the hands of others. For example, the bank is highly reliant on growth in China and Hong Kong, as these two regions generate the majority of its profits. Unfortunately, economic growth in both of these areas is slowing, which puts HSBC in a bind.
Outside of these two key Asian markets, the bank is faced with another aggressive headwind in the form of negative interest rates. Negative interest rates, which are now in place in several regions around the world, constrict the interest income HSBC earns on its reserves and reduce the interest income the bank receives from debtors. While rising interest rates allow banks to make greater profits as they can widen the spread between the interest paid out on deposits, and the interest received on loans, falling interest rates have the opposite effect.
What’s more, by taking interest rates into negative territory, central banks are heading into uncharted waters and there’s no telling how damaging this move could be to the banking industry.
Aggressive headwinds
With China slowing and negative interest rates now becoming commonplace, HSBC will be fighting some very aggressive headwinds moving forward. And according to Bernstein Research, these headwinds will force HSBC to cut its dividend.
According to a research note from Bernstein published in the FT, HSBC’s assumed dividend yield of $0.52 per share for next year would be equivalent to paying 170% of forecast 2016 earnings. While this forecast is concerning, I should point out that Bernstein’s earnings estimates for HSBC are extremely pessimistic. The consensus suggests that next year HSBC’s dividend will be covered 1.4 times by earnings per share. The shares currently support a dividend yield of 8%, so for income seekers who believe that HSBC’s dividend is sustainable, the company could be a great investment.
Nonetheless, there’s one key theme that runs through all the analysis on HSBC for the foreseeable future, uncertainty.
A leap of faith
With central banks heading into uncharted territory with negative interest rates, China slowing and general concerns about global growth, even the most experienced City analysts are finding it difficult to put together reliable forecasts for HSBC’s business. For most investors this should be a huge red flag. There’s so much uncertainty surrounding HSBC and the banking industry in general, trying to predict the outlook for the sector involves a lot of assumptions and guesswork.
