Investors reading the tea leaves of HSBC PLC’s (LON:HSBA) first-quarter numbers could either feel high anxiety or excitement about a potential bargain, depending on their optimism or pessimism about how the coronavirus pandemic unfolds.
Less dramatic than the deadly virus, interest rates may be a source of more agony for the bank.
Indeed, the share price suggests that investors are expecting returns at the FTSE 100 bank’s will remain depressed for a very long time, said one analyst, which could spell encouragement for those of a glass-half-full outlook.
READ: HSBC profits plunge due to preparations for huge coronavirus loan losses
According to the bank’s calculations, current accounting for US$3bn (£2.4bn) of bad debts from the fallout of Covid-19 could eventually see expected credit loss charges of US$7-11bn.
The headlines will be made from that first reported bad debt provision, which led to profits falling 48% in the first quarter to a still-hefty US$3.2bn.
But the hidden cost, in a way, is on net interest margin (NIM), the difference between interest charged on loan and paid on deposits.
This fell to 1.54% from 1.56% in the preceding quarter and 1.59% this time last year, with HSBC warning that there will be “material downward pressure on NIM in future quarters” from incurring the full impact of interest rate reductions by central banks around the world.
The squeeze on NIM is also feeding through to put pressure on profits.
“A change of five basis points might not sound a lot but HSBC has $1trn in loans on its balance sheet so every little change will make a big difference,” says Russ Mould, investment director at AJ Bell.
“Throw in global governments’ desire for banks to offer more credit and potentially not pull the rug on lenders during these difficult times and this is a very difficult environment for banks.”
The bleak banking landscape is reflected in HSBC’s lowly measure of one of the banking sector’s key performance metrics: return on equity.
HSBC’s return on tangible equity (RoTE) was 4.2% in the quarter and, even if the metric is of questionable value and can lead to excessive risk taking, the figure is clearly influencing how investors are valuing the bank, says Mould.
It mean that HSBC’s market valuation is just 0.7 times the bank’s tangible book value, or net assets, of $7.44 (or around 600p) a share.
“Investors are therefore saying that HSBC’s returns on equity are going to remain depressed for a very long time, even once the COVID-19 outbreak is hopefully behind us and the global economy is back on the up,” Mould says.
Interest rates are set to remain at their historically low levels for some time, with slow growth and a swathe of bad loans turning up inevitably from the pandemic.
Add the lack of a dividend payment for the immediate future, and Richard Hunter at Interactive Investor said there was “little to go for” in the bank sector for investors.