not vested
HSBC (5 HK & HSBA LN) - Higher provisions weighed on 2Q results
HSBC’s 2Q20 results was a disappointment despite that pre-provisions operating profit came in 17% better than expected and capital position remained strong with Common Equity Tier 1 ratio came in better than expected at 14.9%.
Higher than expected provisions and ongoing pressure on net interest income (NII) are our key concerns going forward.
With 1-month HIBOR is currently at 25bps (vs. an average of 1.42% in 1H20), we expect net interest margin continue to compress in 2H20 and will weigh on NII and the full impact will gradually be reflected in 2H20e and 21e.
While its strong capital will raise the focus on possible dividend resumption, we do not expect this to happen until next year.
Despite that HSBC commits to several key strategic initiatives, including lower operating cost, reallocating its capital towards Asia, we do not see any near-term catalyst for share price to outperform in the next six months.
We revised down our earnings estimates by 7-14% in 2020e-2021e, driven by a combination of possible impairments, downward pressure on NIM and further impact of “near-zero” interest rate.
We expect downward pressure on consensus estimates in this and next year.
5 HK: We lowered our Fair Value to HK$39 with an unchanged valuation multiple which is set at -2 s.d. to historical average. BUY.
HSBA LN: We set our Fair Value at GBp395 which is set at -2 s.d. to historical average. BUY.
Source: OCBC