This week, it was the turn of the big FTSE 100 banks to report their 2021 results. As interest rates continue to rise, many analysts are getting bullish on the prospects for the sector. HSBC was first to report. The bank’s share price has long commanded a premium compared to its peers given the fact that a significant chunk of its revenue is accounted for in fast-growing Asian markets. But is it a good investment today?
A solid if not spectacular set of results
A near-zero interest rate environment across most developed economies hit HSBC’s revenue, which was down 2% at $49.5bn. However, as the world continued its recovery from Covid and the economic outlook improved, profit before tax increased 115% to $18.9bn. This was driven by a net release of expected credit losses (ECL), as the large number of anticipated business failures following the pandemic never materialised.
In HSBC’s largest business unit, wealth and personal banking, assets increased by 21%. Growth was particularly pronounced in Asia as a result of referrals from wholesale banking clients. A buoyant mortgage market was reflected in lending, which was up 6% on 2020.
The bank continues to pivot away from less profitable income streams. It recently exited US mass retail and its planned sale of France retail will be completed in 2022. As a result of such initiatives, its cost base has decreased by $3.3bn.
Meanwhile, it continues its growth agenda in Asia. Key acquisitions here have been AXA Singapore, L&T Investment Management (a fund house in India), as well as taking full ownership of HSBC Life China.
Cashing in on rising interest rates
Despite these improving headline numbers, the key driver of HSBC’s net interest income will always be interest rates. Recent rises in the UK will help but they still remain at historically low levels. At the moment, large rate hikes seem unlikely, particularly given the level of debt central governments carry on their balance sheets.
What also concerns me, is the cost structure of the bank under a regime of rising interest rates. Historically, it has had a problem on this front. As it continues its transformation journey and increases it exposure to high performing regions in Asia, its simplified structure should help it keep a lid on costs. But the sheer size and scope of the organisation means that progress has been slow and it is not at all clear what the ‘new’ bank will look like once the journey is complete.
A perennial problem for banks is determining the amount of cash to set aside for bad debts. As a result of the emerging Chinese commercial real estate market caused by Evergrande, it has been forced to increase its provisions on this front. Although HSBC having no direct exposure to developers in the so-called ‘red’ category provides some comfort, I think China remains the elephant in the room. If there was a property crash in China similar to 2008, then HSBC would be first in the firing line.
I bought shares in HSBC near the pandemic lows as they clearly had been oversold. With the announcement of a 67% increase in dividend payment, I am now sitting on an attractive yield. However, given all of the above, I will not be adding to my position.
