HSBC (NYSE: HSBC) is scheduled to report its fiscal Q3 2021 results on Monday, October 25. We expect HSBC to top the revenue expectations, while earnings will likely fall short. The bank posted total revenues of $12.6 billion in the last quarter, which was 4% below the year-ago figure. This was due to an 18% y-o-y drop in the global banking and markets segment, mainly driven by lower sales & trading revenues. That said, the company did report a slight increase in commercial banking, and wealth & retail banking businesses driven by higher non-interest income, partially offset by negative growth in net interest income (NII). Further, despite lower revenues on a year-on-year basis, the adjusted net income increased almost 17x to $3.4 billion in the quarter. This was because of a favorable decrease in the provisions for credit losses. We expect the same trend to continue in the third quarter.
Our forecast indicates that HSBC’s valuation is $32 per share, which is 8% above the current market price of close to $30. Our interactive dashboard analysis on HSBC’s Earnings Preview has more details.
(1) Revenues expected to beat the consensus estimates
HSBC’s revenues for full-year 2020 were $50.4 billion – 10% below the year-ago period. This was due to lower revenues in wealth management & retail banking, and commercial banking segments, partially offset by growth in the sales & trading business.
- HSBC generates more than 70% of the total revenues from commercial banking, and wealth management & retail banking divisions. Both the segments reported a 13% y-o-y drop in 2020, due to a drop in outstanding loan balance, interest rate headwinds, and lower consumer demand. While the Q1 results were on similar lines, the core banking revenues saw a slight recovery in the second quarter. It was driven by non-interest income, partially offset by lower NII due to the lower interest rate environment. We expect the same trend to continue in the third quarter.
- The global banking and markets segment, which includes sales & trading, witnessed strong growth in 2020 due to higher trading volumes as a result of the Covid-19 crisis. The same trend continued in the first quarter of 2021. However, the pattern changed in the second quarter, due to lower sales & trading revenues. We expect the segment to follow the same trend in the third quarter.
- Overall, we expect HSBC’s revenues to touch $50.4 billion for FY2021.
Trefis estimates HSBC’s fiscal Q3 2021 revenues to be around $12.21 billion, 3% above the $11.90 billion consensus estimate. We expect the core-banking revenues to drive the third-quarter results.
Moving forward, we expect the sales & trading revenues to normalize over the coming months, with a recovery in the economic conditions. Further, the core banking revenues are likely to benefit from higher non-interest income. But the low-interest rates will likely offset the positive impact to a great extent. Our dashboard on HSBC’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
HSBC Q3 2021 adjusted earnings per share (EPS) is expected to be $0.61 per Trefis analysis, almost 12% below the consensus estimate of $0.69. The bank’s adjusted net income suffered a 35% y-o-y drop to $3.9 billion in 2020, due to lower revenues and a 2.2x increase in provisions for credit losses to $8.8 billion. Notably, the bank increased its provision figure to compensate for the higher risk of loan defaults. The net income more than doubled to $3.9 billion in the first quarter of 2021, as the bank reduced its provisions due to improvement in the loan repayment capability of its customers. The same momentum continued in the second quarter, with the bank’s net income increasing from $192 million to $3.4 billion due to a credit reserve release. We expect the trend to continue in the third quarter.
Going forward, we expect HSBC’s net income margin to be around 16.8% in FY2021 – up from 7.7% in the year-ago period, leading to an adjusted net income of $8.4 billion. This will likely result in an EPS of $2.09.
(3) Stock price estimate 8% higher than the current market price
We arrive at HSBC’s valuation, using an EPS estimate of around $2.09 and a P/E multiple of just above 15x in fiscal 2021. This translates into a price of approximately $32, which is 8% above the current market price of around $30.
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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