HSBC stamps return to health with latest buyback

On track

After throwing markets a googly in the final quarter of last year, and necessary efforts to portray greater stability at the start of this year, the group made substantive progress in top priorities in the second quarter. Most importantly, HSBC signalled on Monday that its goal of returning the Global Banking and Markets division—a major key to market share and sustainable growth—to target profitability is on track. But the group has also outperformed expectations in several other closely watched businesses, leading to better-than-forecast revenue and profit growth that even withstood the usual barrage of one-off items.

Further buybacks likely

Strengthening demand in core public-facing businesses were largely responsible for the $800m rise in adjusted revenue year-on-year, helped by a deeper than forecast reduction of operating expenses in Q2 (saving $621m more than expected), enabling a 12% cut over the first half. Likewise, the group’s capital position continues to shine alongside its most comparable rivals too, inching the top capital ratio (Common Equity Tier 1, or CET1) up to 14.7% (from 14.3% at end-Q1), already 700 basis points above 2017 guidance. Bolstered capital was of course why the group was able to announce the latest in a string of supplementary disbursements to shareholders on Monday. With so much discussion in markets around the subject over the last few months though, there may be a hint of disappointment that the $2bn buyback slated for the rest of the financial year was not larger. In any case, HSBC is now widely assessed as having the resources to increase its return of cash to shareholders even more between now and the first half of 2018, particularly as its CET1 ratio will increase following the repatriation of about $8bn from its U.S. subsidiary after last year’s OK from the Federal Reserve.

Succession relief

Investors are also probably responding positively on Monday to the possibility of a more smoothed-out succession. Current CEO Stuart Gulliver stated that he could remain at the bank till the end of next year after retiring in 2018 so long as an external candidate is appointed to replace him by the new externally appointed Chairman. Brexit-mitigation moves that are well in hand are another reassurance, as HSBC was among the first global banks to place contingency plans on a surer footing, in its case, potentially shifting 1,000 jobs from the UK to Paris.

In our view, whilst laudable, the establishment of the investment banking joint venture I mainland China is largely symbolic for now, though does underscore the emphasis the group is placing on the region and its determination to use an historical advantage to drive growth. All told, we expect HSBC shares to remain among the top two performers in the European banking sector this year on growing confidence that the group has opened a new chapter.

HBSC shares eased moderately off their earlier lead later on Monday and from a technical perspective there is an important concomitant significance in the price at which the stock is appearing to pause.

• Chiefly, the stock on Monday had advanced very close to the highest price it had attained since the financial crisis: 772p, the high on 22nd May 2013
• There is also a 161.8% extension off the down move early in the year that bottomed late in April. 61.8% and its derivatives are often observed to be frequent points at which price reverses, though 772.5p resistance, equating to the peak of what turned out to be at the time a premature assessment of the bank’s post-crisis recovery, is the most cause for investor caution
• After all, the stock’s most recent uptrend commencing from the kick-back point of the Brexit-vote sell-off, has not been an unequivocal one
•  Strictly speaking, with price having violated the clean rising line between April and June (marked by a square on the chart below), the trend line cannot be truly relied on for support going forward
• Price action still shows much that is constructive: base-building over the last month has confirmed the former failure high of 714p to be an important support. It was followed by consolidation and a bullish pennant before a breakout about a week ago
• The stock has also begun to uncoil from an ‘overbought’ state over that timeframe (see Relative Strength Index sub-chart)—in itself another signifier or orderliness—but price has been tardy of following the line of least resistance lower
• That can be interpreted as representing difficult to repress buying interest which even at times begins to overlook temporal valuation considerations
• Bulls will not be concerned by any continued consolidation whilst a support line roughly at 740p is intact, or not tested below for any extended period of time