HSBC shares failed to reap the benefits of rising net interest margins on Tuesday as investors chose to focus on concerns around economic headwinds, including uncertainties in the Chinese property sector.
The HSBC share price was down 6% to 445p at the time of writing.
Investors sold HSBC even though the global bank reported underlying profit that exceeded analysts expectations as the threat of provisions for an economic downturn proved too much of a negative for the market.
The resignation of Finance Director Ewen Stevenson also spooked markets on Tuesday.
“Concern about the impact of a slowing economy on bad debts and growth in the loan book is being exacerbated at HSBC by the departure of well-respected finance director Ewen Stevenson and the deteriorating situation in China,” said AJ Bell financial analyst, Danni Hewson.
“This explains HSBC serving up a better-than-expected set of third quarter numbers only to have the market effectively tell it to get stuffed.”
China Real Estate
There have been well documented problems in the Chinese real estate sector and these issues were apparent in today’s HSBC update. The bank increased the provisions for bad debt, attributing the ‘developments’ in mainland China as one of the reasons for setting aside capital for potential defaults.
This offset some of the surge in revenue’s due to higher interest rates.
Higher Interest Rates
Worries about future provisions even overshadowed a positive outlook for net interest income which HSBC said they expected to be $32 billion in 2022.
Banks are a major beneficiary of higher interest rates which was evident in today’s update from HSBC. HSBC’s Net interest margin rose to 1.57%, a gain of 38 basis points. This helped third quarter adjusted revenue rise 28% to 14.3bn.
“Banks reap rewards when interest rates increase, because their net interest margins, which show the difference between how much a bank earns in interest on loans, compared to what it pays on deposits, soar. That’s exactly what we’ve seen play out at HSBC in the third quarter, and expectations for 2023 also include plumped up net interest income, as the bank sits in anticipation for further rate rises from central banks,” said Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown.
“However, it’s not as simple as saying the current situation is a net win for the financial sector. The rising interest rate environment makes the economic outlook very challenging, and sharp financial contractions are painful for bank”
