HSBC Beats 2Q18 Earnings Estimates, Costs Spiral Upwards

HSBC Beats 2Q18 Earnings Estimates, Costs Spiral Upwards
August 7, 2018

 

Europe’s largest bank by assets, HSBC Holdings plc (NYSE: HSBC) reported better-than-anticipated fiscal 2018 second-quarter results. The banking giant also reported first half pre-tax profit that surpassed analysts’ estimates. However, a steep rise in costs has turned the sentiment bearish towards the stock. Furthermore, HSBC is yet to finalise a deal with the US Department of Justice to close the case regarding unethical sale of mortgage backed securities. Therefore, as discussed below, the stock is expected to remain bearish in the short-term. HSBC closed Monday’s trading session at $46.42.

The London-based bank reported fiscal 2018 second-quarter revenue of $13.30 billion, up 6% from $12.70 billion in the similar period last year. Global businesses mainly contributed to an increase in revenue, partially offset by a revenue decline in Corporate Centre and Global Private Banking divisions. Net interest income increased 9% to $7.64 billion in the recent quarter.

For the second-quarter, the bank reported a profit of $4.09 billion, compared with a profit of $3.87 billion in the similar period last year. The pre-tax profit, on an adjusted basis, is $6.10 billion in 2Q18, up 13.2% from last year and slightly greater than analysts’ estimates.

Adjusted total operating expenses increased 9.5% y-o-y to $8.10 billion. This reflects an increase in investments for programs related to business improvement.

 

Segment wise:

Retails Banking and Wealth Management – Pre-tax profit was $1.70 billion, an increase of 6.3% y-o-y.

Commercial Banking – the segment reported pre-tax profit of $2 billion, up 25% from last year.

Global Banking and Markets – Pre-tax profit increased 11.1% to $2 billion in Q2 2018.

Global Private Banking – pre-tax profit declined 3.8% to $76 million. Rise in expenses caused a decline in profit.

Corporate Centre – Pre-tax profit was $170 million in 2Q18, down 15.5% from the previous year.

 

For the first-half of fiscal 2018, the bank reported revenues of $27.29 billion, up 4% on y-o-y basis and greater than Thomson Reuters’ estimates of $27.63 billion. Profits for the first-half of 2018 were $10.70 billion, up 4.8% from last year.

Operating expenses increased to $17.50 billion in 1H 2018, from $16.4 in the corresponding period of 2017. Most of HSBC’s profit generated from the US was offset by a $765 million offer made by the bank to settle charges related to unethical selling of mortgage backed securities that triggered the financial crisis in 2008. HSBC has clarified that the final settlement is yet to be decided and there is no guarantee that the DoJ will agree to the proposal. This is a matter of concern to investors.

The CEO John Flint stated that the bank plans to spend an additional $15 billion to $17 billion to fuel growth and upgrade technology. The amount would be spent between 2018 and 2020. This would result in a further increase in cost base by “low-to-mid-single digit percentages each year until the end of 2020.”

The bank has repurchased $1 billion worth common shares as of June 30 under the $2 billion share buyback program. HSBC also left the dividend unchanged at 10 cents a share, despite facing an increase in expenses. The rise in expenses caused a decline in profits in the first-quarter.  Therefore, operational costs are closely monitored by investors. As the bank has stated that expenses would rise further in the coming quarters due to implementation of its long-term growth plan, the stock is expected to remain weak.

The stock has broken the 50-day moving average. Furthermore, the MACD indicator is moving in the bearish zone. The next major support is expected only at 42 levels. Therefore, we are expecting the downtrend to continue in the week ahead.

HSBC - Technical Analysis - 7th August 2018

By investing in a put option, we are hoping to gain from the bearish view of the stock. We may purchase the option only if the stock trades near $46 in the equity market. Furthermore, we prefer the option contract to remain active for a period of one week.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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