HSBC Holdings (NYSE: HSBC) (GB: HSBA) shares are down more than 7% in today’s trading session after the British multinational bank and financial services holding company reported disappointing Q1 results.
Disappointingly, the bank issued a cautionary note that its core equity tier 1 ratio could temporarily fall below its targeted minimum range.
Q1 Performance
The bank reported earnings of $0.14 per share, lower than the reported earnings of $0.19 per share for the prior-year period.
Moreover, its revenue of $12.46 billion in the quarter was also 4% lower than the revenues of $12.99 billion reported a year earlier.
Positively, the net interest margin was 1.26% in the quarter, up 7 basis points sequentially and 5 basis points from the year-ago period. Net interest income improved across all businesses, driven by balance sheet growth and a rise in interest rates.
The company reported higher customer lending balances by $9 billion, aided by growth in mortgage balances of $5.8 billion, as well as term and trade lending, especially in Commercial Banking.
On the downside, the company reported an expected credit loss (ECL) of $0.6 billion during the quarter compared to the benefit of $0.4 billion reported in the prior-year quarter.
Higher ECLs were a result of broader economic impacts of the Russia-Ukraine war as well as inflationary pressures.
Caution on Tier 1 Ratio
HSBC cautioned that its core equity tier 1 (CET1) ratio could temporarily fall below its targeted minimum of 14% due to volatility in equity from financial instruments in its hedging portfolio.
Consequentially, the company may not make any new share repurchases in 2022.
Further, it warned that the planned sale of its French retail operations is anticipated to negatively impact the CET1 ratio by 35 basis points during the second half of 2022.
Positive Outlook
Encouragingly, however, the company expects continued growth in net interest income based on improved market consensus policy rate movements as well as mid-single-digit percentage lending growth expectations for 2022.
Likewise, the bank continues to forecast mid-single-digit percentage revenue growth in 2022.
Markedly, the bank expects to generate a return on average tangible equity of at least 10% in 2023, driven by rising interest rates and an improved revenue outlook.
CEO Comments
HSBC Holdings CEO Noel Quinn commented, “We have further reduced costs while maintaining high levels of technology investment and remain on track to achieve our cost and RWA reduction targets for 2022.”
He added, “Although the economic outlook remains uncertain, the continued upward path of interest rates since our full-year results has further strengthened our confidence in delivering a double-digit return on average tangible equity in 2023.”
Wall Street’s Take
Following the results, Morgan Stanley analyst Nick Lord increased his price target on HSBC Holdings to HK$5.90 from HK$5.51 and reiterated a Hold rating.
The Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on six Buys and five Holds. The average HSBC Holdings price target of £595.40 implies 25.9% upside potential to current levels.
Conclusion
The current macroeconomic uncertainty, heightened by the Russia-Ukraine war and inflationary pressures, has led to higher provisions for the bank.
Further, the warning on its CET1 ratio may offset the positive signs from rising interest rates as well as higher lending witnessed across all businesses and regions.
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