Morningstar | Adverse Capital Markets Drag on HSBC 4Q Result
Adverse capital markets conditions experienced globally in the fourth quarter were a drag on HSBC’s result, resulting in lower trading income and net fee income against previous quarters. The weaker trading income was consistent with European and U.S. peers while banks in Asia posted a decline in net fee income on lower brokerage and sales from investment products. For HSBC, the lower income in the fourth quarter resulted in negative jaws, or operating growth outpacing revenue growth, for the full year against management’s earlier positive jaw guidance. While the market is likely to interpret this as a negative, we note that operating expense was steady and the decline in income was attributable to market conditions. Management is committed to maintaining a positive jaw in the medium term. For the full year, the underlying metrics for retail banking and commercial banking continue to perform well, in our view.Asset quality was strong with nonperforming loans remaining benign at 1.3% of total loans. As previously noted, credit cost is expected to normalise to a range of 30 to 40 basis points on total loans. An uplift in expected credit loss in the fourth quarter was due to the probability change in the various scenarios in calculating the credit loss, including weaker outlook in the U.K. Our forecasts have previously assumed a steady increase in expected credit losses but we adjust our forecast to factor an acceleration in credit cost given the rising uncertainty in economic conditions. We also factor in slower increase in net interest margin in 2019 and 2020.
Our fair value estimate is reduced to HKD 80, GBX 790 and USD 52, from HKD 90, GBX 880 and USD 58 for the respective listings. We continue to see HSBC as undervalued as we believe concerns over a deterioration in global trade are factored into current share price. Our new fair value represents a price/book ratio of 1.3 times with return on tangible equity increasing over our explicit forecast period.
HSBC Holdings is a financial services holding company. Through its subsidiaries, Co. operates four businesses: Retail Banking and Wealth Management, which serves customers through four businesses: Retail Banking, Wealth Management, Asset Management, and Insurance; Commercial Banking, which provides working capital, term loans, payment services, and international trade facilitation; Global Banking and Markets, which delivers a range of transaction banking, financing, advisory, capital markets, and risk management services; and Global Private Banking, which provides a range of private banking services. At Dec 31 2017, Co. had total assets of US$2.52 trillion and deposits of US$69.92 trillion.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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