HSBC Holdings PLC (LSE:HSBA) is the next cab off the rank in the UK bank earnings season and like NatWest and Barclays there will be plenty to chew on.
For a start, the numbers are just that much bigger.
HSBC’s fourth-quarter earnings alone are tipped to be around US$7bn or in the ballpark of the amount its rivals managed for a full twelve months.
Annual profits, meanwhile, will come in at a gargantuan US$34bn or thereabouts.
But big is not necessarily better in the world of banking and despite its size, HSBC has plenty of issues to address.
Number 1: Most of HSBC’s Asia revenues come from Hong Kong and China.
This puts the bank’s Hong Kong wing in murky waters considering its concurrent exposure to the ongoing property crisis and margins could face a squeeze if China-linked bad debts begin piling up.
HSBC sought to allay concerns over its exposure to the likes of Evergrande and Country Garden in the third quarter, stating that “we continue to monitor risks related to our exposures in mainland China’s commercial real estate sector closely”.
But with $800 million in expected credit losses attributed to Chinese property racked up in the nine months to 30 October 2023, anxieties are justified.
Firm-wide, HSBC typically allows for credit losses between 0.3% to 0.4% of average gross loans. If this figure comes in hot, soothing words won’t be enough.
Number 2: Gearing to US interest rates
HSBC says that every point upwards in US rates can add hundreds of millions of dollars to its bottom line and vice versa presumably.
So with earnings especially geared to movements in US interest rates, assumptions on how they will move over the next year can have a big impact
“Overall, the Group is positively exposed to rising interest rates through net interest income, although there is an adverse impact on our capital base in the early stages of a rising interest rate environment due to the fair value of hold-tocollect-and-sell instruments.
"Over time, these adverse movements will unwind as the instruments reach maturity, although not all will necessarily be held to maturity."
The good news is that the mood currently has been to rein back expectations for the US to cut rates aggressively, which in theory should be helpful for HSBC.
Number 3: Costs are too high
A constant grumble for analysts that follow the bank and despite attempts at job cuts in the past remains an ongoing one.
Net interest margins in the third quarter were 1.7% or well behind its peers in the UK even though there was a big uptick due to the rising rate tailwind.
Barclays pointed to substantial staff cuts today and it would surprise few if HSBC did the same tomorrow.