HSBC has gone through a significant transformation in recent years, which has sent its share price on a bearish spanning from 2017 till to date. By end of FY19, the bank has successfully completed its restructuring exercise, which resulted in the shedding of 180 full-time employees and other costs savings, in addition to, completing its de-risking exercise. Despite these positive traits, HSBC has not been spared from the negative implications brought about by the pandemic, which has resulted in further selling pressure on the stock.
H1 2020: COVID-19 related implications
In H1 2020, the bank’s customer loan book grew marginally by 1.0 per cent (FY19: 4.7 per cent), with management attributing this to a strong growth across the commercial banking lending book and stable retail lending book where growth in retail lending balances over the first two months of 2020 was offset by declines post-March due to COVID-19. Additionally, HSBC incurred lower interest paid on customer deposits following revision of savings rates. These were offset by the effects of interest rate cuts made in September 2019 (EUR) and March 2020 (USD and GBP), together with a further decline in the average yield on the investment book, which resulted in the net interest income decreasing by 0.2 per cent on a comparative basis.
Following easing of the strict restrictions implemented in Q1 2020, July saw a good recovery in property sales. However, this may be attributable to other factors rather than an economic recovery, as the easing of the COVID-19 restrictions has facilitated negotiations between market participants, in addition to the initiatives implemented by the Government of Malta to stimulate the property market such as the reduction of taxes related to sales and purchases of real estate.
The bank’s revenue was further characterised by a reduction in fees and commissions (-6.5 per cent in H1 2020) as a result of a drop in activity due to the outbreak across cards, payments, insurance, and credit facilities. Additionally, HSBC’s insurance segment reported significant losses (a loss of €8.9m for H1 2020) which predominantly were driven by revaluation losses as a result of adverse market movements (equity and interest rates) and lower trading activities as a result of the current pandemic.
In view of the current depressed economic sphere, HSBC booked €8.7m in provisions for expected credit losses. This, combined with the above resulted in net operating income to drop from €74.5m in H1 2019 to €52.9m in H1 2020, meaning a drop of 29.0 per cent.
From a positive perspective, the bank managed to decrease its operating expenses by five per cent during the first six months of this financial year. As noted earlier, this was achieved as a result of the restructuring exercise done prior to the outbreak. HSBC’s resilience has also been substantiated with its capital ratios where these continued to strengthen. As at June 2020, the total capital ratio stood at 19.3 per cent (FY19: 19.0 per cent).
What lies ahead?
The bank’s outlook faces several downside risks including, potential further deterioration of the current situation leading to an increase in non-performing loans and higher expected credit losses, coupled with the fact that HSBC’s performance is vulnerable to the performance of financial markets, especially the insurance segment. Another drawback to the baking industry is that there will be a time lag between the eventual recovery of the economy and the recovery of banking institutions, even more so if we continue to see further provisions for expected credit losses.
Furthermore, Malta is experiencing strong headwinds on issues concerning the rule of law and prevention of financial crime, which consequently damaged the country’s reputation and its attractiveness as a financial services hub. This together with the pandemic, poses a significant threat to the economic outlook and consequently the performance of the Bank.
In view of the current unprecedented situation, the European Central Bank is not expected to increase interest rates any time soon, as these will most probably remain low until the eventual economic recovery of the European Union. This, combined with the downside risks mentioned above has pushed banking stocks to historical low levels, with HSBC currently trading at a price to book of 0.58x.
Disclaimer: This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.