HSBC (NYSE: HSBC) is scheduled to report its fiscal Q1 2021 results on Tuesday, April 27. We expect HSBC to outperform the consensus estimates for earnings, while revenues are likely to miss the expectations. The bank has surpassed the consensus estimates in each of the last two quarters, mainly due to strong growth in sales & trading revenues and a sequential decline in provisions of loan losses over the third and fourth quarters. However, HSBC’s revenues for the full year 2020 were 10% lower than the 2019 figure. This was driven by lower core-banking revenues, which suffered due to lower loan growth and interest rate headwinds. We expect the same trend to drive the first-quarter FY2021 results as well.
Our forecast indicates that HSBC’s valuation is around $32 per share, which is 11% more than the current market price of around $29. Look at our interactive dashboard analysis on HSBC’s pre-earnings: What To Expect in Q1? for more details.
(1) Revenues expected to be below consensus estimates in Q1
Trefis estimates HSBC’s fiscal Q1 2021 revenues to be around $12.53 billion, 2% below the $12.80 billion consensus estimate. Its revenues of $50.4 billion for the full year 2020 were 10% lower than the 2019 figure. The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity in 2020. HSBC’s core banking operations were hit due to the slowdown. The bank is heavily dependent on its core banking business and derives close to 55% of its revenues from net interest income. The net interest income decreased 9% y-o-y, mainly due to lower loan issuance and a drop in net interest margin (NIM) – NIM of 1.32% in 2020 was 26 basis points lower than the 2019 figure. The loan issuance suffered due to lower consumer spending levels, while the net interest margin decreased due to interest rate headwinds. That said, positive growth in sales & trading was able to offset the weakness in other segments to some extent. We expect the same trend to continue in the first quarter of FY2021, with sales & trading pushing the revenues up and the weakness in core banking, hurting its top-line.
Although the consumer spending levels are likely to improve in the subsequent quarters with improvement in the economy, interest rates are unlikely to see an immediate recovery. Further, the sales & trading revenues are expected to normalize in the coming months. Overall, the above factors will likely restrict HSBC’s revenues to $49.4 billion in FY2021. Our dashboard on HSBC’s revenues offers more details on the company’s segments.
2) EPS likely to beat the consensus estimates
HSBC’s Q1 2021 adjusted earnings per share (EPS) is expected to be $0.55 per Trefis analysis, almost 6% above the consensus estimate of $0.52. The bank’s adjusted net income decreased 35% y-o-y to $3.9 billion in 2020, reducing the EPS figures from $1.47 to $0.96. This could be attributed to significant build-up in provisions for loan losses from $2.8 billion to $8.8 billion, to compensate for the deteriorating loan repayment capability of its customers. Further, its operating expenses as a % of revenues increased from 80.4% to 85.8% in the year, mainly driven by higher compensation costs. That said, the bank saw a sequential decrease in provisions over the last two quarters of 2020, which signals some improvement in the loan repayment capability of its customers. We expect the same momentum to drive the first-quarter results as well.
The provision figure is expected to further decrease in the subsequent quarters, as more and more people receive the Covid-19 vaccine and the economic conditions recover. It will likely boost the bank’s profitability, enabling it to report an EPS of around $1.70 in FY2021.
(3) Stock price estimate 11% more than current market price
Going by our HSBC’s valuation, with an EPS estimate of around $1.70 and a P/E multiple of close to 19x in fiscal 2021, this translates into a price of $32, which is 11% above 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
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