Invest In HSBC Stock For 35% Gains

by Trefis Team
+25.11%
Upside
25.76
Market
32.23
Trefis
HSBC
HSBC
Rate   |   votes   |   Share

HSBC stock (NYSE: HSBC) has 35% upside (to pre-crisis level) in 1-2 years as the lower interest rate environment improves and GDP sees some recovery, leading to a growth in total loans and net interest income. HSBC stock currently trades near $27 and it has lost around 32% in value so far this year. It traded at a pre-Covid high of $36 in February, and it is 26% below that level now. Also, the stock has further lost around 5% since its March market lows of $28 after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 60%), as investors are cautious about the impact of lower interest rates and higher provision for loan losses on its profitability – profit after tax is down 46% y-o-y in Q3 and 62% cumulatively for the first three quarters.

HSBC is heavily dependent on its core banking business which generated around 71% of its revenues in 2019 – the bank is very sensitive to changes in interest rates which impacts its net interest spread. Further, uncertain economic conditions affects the loan repayment capability of customers, increasing the probability of loan defaults. The bank increased its provision for credit losses in order to compensate for that risk – up from $8.7 billion at 31st December 2019 to $13.7 billion by Q3 2020. However, we expect the situation to improve in the coming months driven by recovery in demand and gradual improvement in economic conditions. Moreover, decline in the provision for credit losses can improve HSBC’s profitability in the near term-providing a boost to the bank’s stock price. In view of the movement in HSBC stock since late March, we believe that the stock has room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions.  Our conclusion is based on our detailed analysis of HSBC’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how HSBC and the broader market performed during the 2007/2008 crisis

2007-08 Financial Crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

HSBC vs S&P 500 Performance Over 2007-08 Financial Crisis

HSBC stock declined from levels of around $49 in September 2007 (pre-crisis peak) to levels of around $20 in March 2009 (as the markets bottomed out), implying HSBC stock lost 60% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $34 in early 2010, rising by 71% between March 2009 and January 2010. In comparison, the S&P 500 declined by 51% before recovering by 48% between March 2009 and January 2010.

HSBC Fundamentals

HSBC’s revenues have decreased from around $60 billion in 2015 to $56 billion in 2019, primarily due to the low-interest environment and sub-par performance of its global banking markets. Moreover, HSBC’s earnings per share fell from $3.24 per share in 2015 to $1.48 in 2019. HSBC’s Q3 2020 net revenues were 11% below the level seen a year ago, while the EPS figure for the quarter fell from $0.15 in Q3 2019 to $0.07 in Q3 2020.

Conclusion

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $36 (35% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $36 level HSBC stock was at before the coronavirus outbreak gained global momentum.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!