Sep 24, 2020
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HSBC Looks Undervalued As Asian Economy Gets Back On Track

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HONG KONG CHINA – 2020/08/31: British multinational banking and monetary services holding company. [+] SOPA IMAGES/LIGHTROCKET VIA GETTY IMAGES HSBC stock (NYSE: HSBC) lost nearly 40% – dropping from $40 on the end of 2019 to around $24 in early April – before further declining to around $22 now. This suggests the stock is around 45% below at the beginning of the year


There are a few reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This may negatively affect businesses and individuals impacting their loan repayment capability and exposing HSBC to sizable loan losses. Moreover geopolitical uncertainty via heightened tension between the US and China continue to adversely impact the bank s performance


But does it mean HSBC stock is undervalued? Sure it does. Trefis estimates HSBC s valuation to be around $26 per share – about 20% above the current market price – based on an upcoming trigger explained below and one risk factor. The trigger is a far better trajectory for HSBC s revenues over the second half the year


We expect the corporate to report $52. 5 billion in revenues for 2020 – below the figure for 2019. Our forecast stems from the idea that as economic conditions have began to recover in Q3 the bank s performance will steadily improve. Further the easing of lockdown restrictions in a lot of the world is probably going to assist consumer demand benefiting the overall business scenario


Moreover HSBC s Asia banking business has remained robust with the bank reporting a profit of greater than $7. 3 billion in YTD 2020. The bank s investment banking operations have driven positive revenue growth in Q1 and Q2 via higher trading volumes with the bank s trading revenues surging by 35% within the first half 2020 as when compared with the year-ago period


On similar lines HSBC s advisory and underwriting fees saw significant growth within the first half 2020 via a jump in debt underwriting deals after the Fed stimulus. This has partially offset the impact of weak revenues in other segments. While we expect the trading income to drop within the subsequent quarters it is more likely to be still higher than the year-ago period


Overall we see the bank reporting an EPS within the range of $1. 02 for FY2020. Thereafter HSBC s revenues are expected to enhance to $53. 7 billion in FY2021 via an increase in retail revenues partially offset by a decline in sales & trading revenues. Further the web income margin is more likely to grow as when compared with the previous year via a decline in provisions for credit losses resulting in an EPS of $1


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No Putting A Person Of Color On Your Panel Doesn t Accomplish Diversity Finally how much should the market pay per dollar of HSBC s earnings? Well to earn almost $1


91 per year from a bank you d ought to deposit about $191 in a savings account today so about 100x the specified earnings. At HSBC s current share price of roughly $22 we’re talking a few P/E multiple of slightly below 12x. And we expect a figure in the direction of 13


5x will be appropriate. That said banking is a risky business right now. Growth looks less promising and near-term prospects are below rosy. What s behind that? HSBC has a big portfolio of consumer commercial and wealth management loans – greater than $1 trillion in FY 2019. The economic downturn could deteriorate the loan repayment capability of its consumers exposing the bank to significant loan defaults


In anticipation of this risk HSBC has increased its provisions for loan losses from around $1. 1 billion within the first half 2019 to $6. 9 billion so far – a 6x jump. If the economic condition worsens this figure could further increase within the subsequent months. Further a negative economic outlook will make it expensive for the bank to draw funding increasing the price of its operations


To sum things up we believe that HSBC s stock is currently undervalued and provides upside given its strong retail and investment banking operations. What in case you re looking for a more balanced portfolio instead? Here s a first-class portfolio to outperform the market with over 100% return since 2016 versus 55% for the S&P 500


Produced from companies with strong revenue growth healthy profits quite a few cash and occasional risk. It has outperformed the broader market year after year consistently. See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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