HSBC share price: where next after better-than-expected Q3 result

The company reported quarter profit before tax of USD 3.07 billion (down 1.8 billion, 36% as compared to 3Q19) and a revenue of 120 billion. Better still, HSBC revealed an expected credit loss of only 0.8 billion, a significant decline from the 4 billion in 2^nd quarter.

Key price levels to watch: (HKEX: 00005.HK)

Enter price: $32 (pivot)

Target price: $40 (based on current balance sheet level, a price to book ratio of over 0.60)

Key takeaways: operating factors that impacted HSBC’s 3^rd quarter result

1. The declining NIM (net interest margin) is detrimental to HSBC’s revenue growth during the Covid-19 period

The narrowing NIM has come amidst the reduction of central bank rates. This lowered interest rate has been imposed by most developed countries after the first quarter of the year, resulting in the bank struggling at a low operating margin. In Q3, HSBC’s NIM dropped from 133 bps in Q2 to 120 bps leading to a lower net interest income for HSBC in that quarter.

2. Credit performance ameliorate in the new quarter, a turnaround from the scenario of an immerse credit loss in the 2^nd quarter.

The pandemic had definitely taken a grave toll on the overall solvency of companies, especially on the small and medium enterprises. Against such a backdrop, HSBC announced a record high of nearly 40 billion ECL (expected credit losses) in Q2, significantly dragging the company’s overall operating performance. However, with resumption of industrial activities in the summer within the northern hemisphere, we saw an uplift in most companies cash inflow which also resulted in HSBC’s credit quality bottoming out. With the significant drop in HSBC’s ECL in the 3^rd quarter result, investors are more confident that HSBC share price has bottomed and there are more reasonable grounds for the HSI banking flagship to rally in the near future.

Challenges at present

Despite the above factors and promising results, HSBC still faces multiple challenges stemming from both internal and external influences.

1. Lower interest rate from global central banks remains a headwind. The propensity for further rate cut for most central banks will be limited, hence a further NIM decline would be unlikely. HSBC would need to shift to a revenue model that is less reliant on net interest income.

2. The recovery from the pandemic situation in the U.S. and Europe is still lagging as compared to Asia. Risks from a potential slowdown in these countries would impact HSBC if there is a lack of geographical income diversification.

Conclusion

A neutral to positive outlook may be given for HSBC based on its improving credit quality, a more stable revenue contribution from Asia and the revitalization of its UK and European market. But any disruption of production within the Northern hemisphere may be one to test this theory.

Possible risks

A second wave of the virus infections breaking out in Europe and the U.S will be one to cause market slowdown. With lockdown and social distancing measures likely to be put in place again, consumption and industrial activities will lead to even more insolvency of enterprises. This would potentially result in a deterioration of HSBC’s credit quality.

How to manage risk?

Traders should set a percentage to stop loss (typically at 10% of the buying price). If the short term moving average line (e.g. 20-day) cross from above the long term moving average line (e.g. 60-day), it is possible that the stock price will continue to drop. It is strongly recommended to place a stop loss to mitigate any potential losses.