HSBC Holdings PLC (LSE:HSBA)’s share price rose by more than 6% on Monday after it surpassed quarterly expectations, yet analysts warn that the ongoing attack from activist shareholder Ping An threatens to undermine its investment case.
The bank today revised its return on tangible equity (ROTE) guidance to above 12% for 2023 and said it would reinstate its quarterly dividend.
However, group chief executive Noel Quinn’s promise to restore the dividend to pre-pandemic levels follows direct pressure from its largest shareholder.
"Pressure from HSBC’s largest shareholder, Ping An, to divide its Asian and western operations had led the banking giant to commit to restoring the dividend to pre-pandemic levels,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
Lund-Yates said rising interest rates have contributed to lifting the bank's bottom line, giving “activist shareholders even more clout to pressure the business to find new, potentially radical, ways to propel growth.”
Chinese insurance conglomerate Ping An entered talks with HSBC earlier this year, urging the bank to spin out its Asia operations and float them on the Hong Kong stock exchange.
The bank’s Asia operations account for a majority of its profits, according to its interim results, which show its Asia business delivered US$6.3bn of adjusted profits compared to US$2.5bn at HSBC UK.
UK stockbroker Shore Capital said in a research note today that it envisions potential for HSBC’s share price to run higher, saying 600p would represent fair value, but put the bank’s stock on 'hold' recommendation.
The broker cautioned that the challenge from HSBC's largest shareholder Ping An, who seeks to split the company between east and west, adds uncertainty to its bottom line.
“The group also continues to face attack from its largest shareholder Ping An, which is proposing that the group should break itself up in order to create more value given the perceived geopolitical risk associated with it being a global bank that straddles both the East and West,” its analysts said. “This brings added uncertainty to the investment case, in our view.”
Jefferies also repeated its 'hold' rating for the stock.
Shore Capital said HSBC’s results “show a significant beat to consensus earnings forecasts” and reflect “stronger-than-expected pre-tax profit performance along with a sizeable one-off deferred tax benefit”.
The broker also anticipates upgrades in the consensus forecast, after the bank revised its return on tangible equity guidance. Its analysts now forecast that the bank will deliver pre-tax profit of US$15.29bn, above the consensus of nearly US$14.69bn, in 2022.
However, “zooming out to the bigger first-half picture" there are "some warning signs", according to Lund-Yates, who said the bank "recognised a charge of over $1bn relating to expected credit losses and impairments as the economic outlook weakens".
Richard Hunter, head of markets at interactive investor, noted that HSBC’s exposure to Asia has been “something of a blessing and a curse over recent months”.
“Apart from a rising interest rate environment which is beginning to benefit the banks as a whole. HSBC also retains a tight control on costs as it moves towards digitisation, and second quarter operating expenses declined by 5%,” he said.
“While further share buybacks are unlikely this year, the return of quarterly dividends and an attractive payout ratio next year should assuage investors.”