HSBC Holdings (NYSE: HSBC) is scheduled to report its fiscal Q4 2020 results on Tuesday, February 23. We expect HSBC to likely surpass the consensus estimates for revenues and earnings. The bank reported total revenues of $11.9 billion in the third quarter of 2020 – down by 11% y-o-y. This was primarily driven by a 15% drop in net interest income due to interest rate headwinds, partially offset by growth in trading revenues. That said, the bank’s provisions for credit losses fell by 80% on a sequential basis resulting in a significant improvement in its profitability. We expect the same trend to drive the fourth-quarter results. Overall, HSBC is expected to report negative growth in FY2020 revenues, mainly due to lower customer activity levels and reduced global interest rates.
Our forecast indicates that HSBC’s valuation is around $25 per share, which is 15% lower than the current market price of around $29. Look at our interactive dashboard analysis on HSBC’s pre-earnings: What To Expect in Q4? for more details.
(1) Revenues expected to surpass the consensus estimates in Q4
Trefis estimates HSBC fiscal Q4 2020 revenues to be around $11.97 billion, around 5% above the $11.40 billion consensus estimate. The bank has a sizable loan portfolio and is very sensitive to changes in interest rates – $395 billion in retail banking loans and $346 billion in commercial loans (as per 2019 data). It drives a majority of its revenues from net interest income – 54% in 2019, which has suffered in 2020 due to the lower interest rate environment and a drop in new loan issuance. On the flip side, HSBC has made some gains in its sales & trading business driven by higher trading volumes, however, the gains were too small in comparison to weakness in the net interest income. Altogether, HSBC has reported a 9% y-o-y drop in its cumulative nine months revenues. We expect the same trend to continue in the fourth-quarter results, restricting the full-year 2020 revenues to $50.6 billion – 10% lower than the 2019 figure.
Although the lower interest rate environment is likely to remain for the next 1-1.5 years, we expect the core banking revenues to see some recovery in the subsequent quarters driven by improvement in consumer activity levels. This is likely to enable the bank’s revenues to touch $51.9 billion in FY2021. Our dashboard on HSBC revenues offers more details on the company’s segments.
2) EPS likely to beat the consensus estimates
HSBC Q4 2020 adjusted earnings per share (EPS) is expected to be $0.09 per Trefis analysis, almost 29% above the consensus estimate of $0.07. While the Covid-19 crisis has increased the risk of loan defaults, the bank has significantly raised its provision for credit losses to neutralize that risk – from $2 billion at the end of September 2019 to $7.6 billion at the end of September 2020. Further, the bank has announced a restructuring plan to reduce capital and costs in its underperforming businesses to enable continued investment in businesses with stronger returns and growth prospects. It incurred some restructuring costs in 2020 and is expected to incur more costs over 2021-2022. We expect the above factors to drive the fourth-quarter results, leading to an EPS figure of around $0.94 for the full-year 2020. Thereafter, given the mass distribution of the Covid-19 vaccine and expected improvement in the economic conditions, provisions for credit losses are likely to see some favorable drop. This will likely boost HSBC’s profitability, enabling the bank to report an EPS of around $1.89 in FY2021.
(3) Stock price estimate 15% lower than the current market price
Going by our HSBC Valuation, with an EPS estimate of around $1.89 and a P/E multiple of just above 13x in fiscal 2021, this translates into a price of $25, which is 15% below the current market price of around $29.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
While HSBC stock may be overvalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for DTE Energy vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.