The FTSE 100 has dropped 0.9% at the open today (5 May), dragged lower by a 5% slump in HSBC (LSE: HSBA) shares after underwhelming results. With oil prices also surging on escalating Middle East tensions, investors may be wondering whether this is a short-term wobble or a sign of deeper pressure on the market.
Q1 results
Q1 earnings from the Asian-focused bank showed a mixed picture, with investors focusing more on rising risks than steady top-line growth.
Revenues rose around 6% year on year, supported by stronger performance in wealth management and higher net interest income. However, sentiment was weighed down by a notable increase in credit losses, which rose to $1.3bn, up $0.4bn from the same period last year.
This was partly driven by a fraud-related charge in UK corporate and institutional banking. In addition, a more cautious economic outlook reflected heightened geopolitical uncertainty and soaring oil prices.
Costs also increased, driven by inflationary pressures, higher performance-related pay, and continued investment in technology. Despite this, management reaffirmed its medium-term targets, including a return on tangible equity of 17% through to 2028.
So are investors reassured by the resilience in revenue or more concerned about the growing signs of credit stress?
What the sell-off is really telling investors
The sharp early sell-off reflects a shift in how investors are weighing growth against risk. Revenue growth and profitability remain broadly resilient, but rising credit losses have added to concerns that the economic backdrop is weakening faster than expected.
Expected credit losses are now higher, signalling potential stress building in lending portfolios at a time of already elevated global uncertainty.
Banks face particular pressure in this environment. Credit provisions act as a forward-looking measure of asset quality. So any increase tends to weigh on sentiment even when headline profits hold up.
Rising oil prices and escalating geopolitical tensions are adding to that pressure. They are fuelling concerns about persistent inflation and slower growth. This is raising fears of a return to a 1970s-style stagflationary environment. That backdrop increases the risk of further loan impairments.
Against this backdrop, investors are reassessing whether current earnings strength is sustainable or masks emerging weakness beneath the surface.
The result is a clear market tension: resilient near-term performance versus growing uncertainty about the outlook. That uncertainty is driving the move in early trading.
What’s the verdict?
Looking beyond near-term volatility, one of the more important signals in the results was the resilience in net interest margin. It was 1.6%, slightly lower than the previous quarter. However, it still points to a relatively supportive interest rate environment for lenders compared with the ultra-low rate era.
More broadly, persistently higher oil prices and sticky inflation make a return to near-zero interest rates unlikely. That is particularly true given already elevated levels of global debt.
This matters for long-term earnings power. A higher-rate environment supports structurally stronger net interest income, even if credit conditions fluctuate.
For long-term investors, the key question is whether short-term credit concerns are masking a more durable earnings opportunity in a higher-rate world. I think the combination of resilient margins and a structurally higher rate environment continues to support the long-term earnings case, despite near-term volatility.
