HSBC Holdings (NYSE: HSBC) It is scheduled to release its results for the fourth quarter of fiscal 2020 on Tuesday, February 23. We expect HSBC to likely beat consensus estimates for both revenue and earnings. The bank reported total revenue of $ 11.9 billion in the third quarter of 2020, down 11% year-on-year. This was mainly due to a 15% drop in net interest income due to headwinds in interest rates, partially offset by growth in trading income. That said, the bank’s bad debt provisions decreased 80% on a sequential basis, resulting in a significant improvement in its profitability. We expect the same trend to fuel fourth quarter results. Overall, HSBC is expected to post negative revenue growth for fiscal 2020, mainly due to lower customer activity levels and lower global interest rates.
Our forecast indicates that HSBC’s valuation is around $ 25 per share, which is 15% below the current market price of around $ 29. Watch our interactive dashboard analysis at HSBC pre-earnings: what to expect in the fourth quarter? for more details.
(1) Revenue expected to exceed consensus estimates in Q4
Trefis estimates HSBC’s revenue for the fourth quarter of 2020 to be around $ 11.97 billion, around 5% above the consensus estimate of $ 11.40 billion. The bank has a large loan portfolio and is very sensitive to changes in interest rates – $ 395 billion in retail bank loans and $ 346 billion in commercial loans (based on 2019 data). It derives the majority of its income from net interest income – 54% in 2019, which suffered in 2020 due to lower interest rates and lower new loan issuance. On the other hand, HSBC made gains in its sales and trading business through higher trading volumes, but the gains were too small compared to the low net interest income. In total, HSBC announced a 9% year-on-year drop in its nine-month cumulative revenue. We expect the same trend to continue in the fourth quarter results, limiting full year 2020 revenue to $ 50.6 billion, down 10% from the 2019 figure.
While the decline in interest rates is expected to last over the next 1 to 1.5 years, we expect core banking income to see some recovery in the following quarters, thanks to improving levels of consumer activity. This is expected to allow the bank’s revenue to hit $ 51.9 billion in FY2021. Our dashboard on HSBC turnover offers more details on the business segments.
2) BPA likely to beat consensus estimates
HSBC Q4 2020 adjusted earnings per share is expected to be $ 0.09 per Trefis analysis, nearly 29% above the consensus estimate of $ 0.07. As the Covid-19 crisis increased the risk of default, the bank significantly increased its allowance for credit losses to neutralize this risk – from $ 2 billion at the end of September 2019 to $ 7.6 billion at the end of September 2020. In addition, the bank announced a restructuring plan to reduce capital and costs in its underperforming businesses to enable continued investment in companies with stronger returns and growth prospects. It incurred restructuring costs in 2020 and is expected to incur more costs in 2021-2022. We expect the above factors to drive fourth quarter results, leading to an EPS of approximately $ 0.94 for the year 2020. Thereafter, considering the mass distribution of the Covid-19 vaccine and the expected improvement in economic conditions, provisions for credit losses should decline favorably. This will likely increase HSBC’s profitability, allowing the bank to report EPS of around $ 1.89 in fiscal 2021.
(3) Estimate of the share price 15% lower than the current market price
According to our HSBC valuation, with an EPS estimate of around $ 1.89 and a multiple of P / E just above 13x in FY 2021, that translates to a price of $ 25, or 15 % below the current market price of about $ 29.
Note: P / E multiples are based on the stock price at the end of the year and the reported (or expected) adjusted profit for the full year
While HSBC stock may be overvalued, 2020 has created many price discontinuities which can provide some interesting trading opportunities. For example, you will be surprised how the valuation of DTE Energy stocks relative to World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many discontinuous pairs here.
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