Will Asia Continue To Drive Growth For HSBC In Q1?

by Trefis Team
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HSBC (NYSE: HSBC) is set to announce its Q1 2019 results on May 3, followed by a conference call with analysts. Consensus estimates for the banking giant’s revenues for the quarter are close to $13.9 billion, which indicate a marginal increase in revenues year-on-year. This is understandable, as rising geopolitical risks, slowing economic momentum and a weaker global economic outlook would have weighed on revenues across the bank’s operating divisions.

Per Trefis estimates, HSBC’s shares have a fair value of $50 which is roughly 15% ahead of the current market price. We have summarized our key expectations from the earnings announcement in our interactive dashboard How Is HSBC Likely To Have Fared In Q1? You can modify any of our key drivers to gauge the impact of changes on its valuation, and see more Trefis Financial Services Data here.

A Quick Look at HSBC’s Revenue Sources

HSBC reported $53.8 billion in Total Revenues in Fiscal 2018. This included 3 primary revenue streams:

  • Net interest income: $30.5 billion in FY 2018 (57% of Total Revenues). This represents interest earned through loans and other assets net of interest paid to deposits.
  • Net Fee Income: $12.6 billion in FY 2018 (24% of Total Revenues). This income includes fees for general banking products, services and revenues from wealth structuring solutions and other asset management-related fees
  • Net income from financial instruments: $8.6 billion in FY 2018 (16% of Total Revenues). This income includes favorable effects of foreign currency translation differences and significant items relating to favorable fair value movements on financial instruments, including non-qualifying hedges and debit valuation adjustments.

Key Factors To Watch For In Q1

Asia Will Continue To Drive HSBC’s Growth

  • Asia’s revenues grew by 11% year-over-year to $28.8 billion in 2018 and accounted for nearly 49% of the total revenue mix while the pre-tax profit of $17.8 billion accounted for almost 90% of the bank’s total pre-tax profit.
  • Retail Banking and Wealth Management constituted nearly 40% of the Asia segment’s revenues in 2018, and we expect this trend to continue in the near future. Trends such as urbanization and internationalization of trade, particularly in China, boosted the bank’s growth in RBWM. Moreover, continued development of the Asian middle class and high savings rate have aided the bank’s Retail Banking growth and will continue to do so over the foreseeable future.
  • We forecast HSBC’s Asia revenues to grow 11% in 2019 to $32 billion, primarily driven by growth in Hong Kong and Mainland China. Although, China’s economy faces domestic and external pressures, it will continue to drive growth for HSBC.

Cost Efficiency Ratio Likely To Improve

  • HSBC has been extremely successful in reducing its costs over the years, with non-interest expense falling from $39.8 billion in 2015 to $34.6 billion in 2018 (indicating a 4.5% reduction in costs on average each year). This helped the bank improve its adjusted cost efficiency ratio to 62.5% in 2018 from 66.5% in 2015. We expect this figure to improve further to reach 61% in 2019 as growth in revenues are likely to outpace growth in non-interest expense.

 Impact Of  Weak Global Economic Outlook On HSBC

  • Uncertainty surround global trade disputes and Brexit have negatively impacted the global economy over recent months. This, in turn, has reduced client activity and lowered investor sentiment in key markets around the globe and will likely reduce HSBC’s revenue growth rate in the near future.
  • Political risks also remain elevated, adversely impacting business investment and economic activity, and this is likely to weigh on the bank’s profitability.
  • Moreover, with the low interest rate environment likely to remain in European countries for several quarters at least, the bank’s net interest income will remain under pressure. As we pointed out above, net interest income constituted more than 55% of the bank’s total revenues in 2018.

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