Following 4Q23 results, HSBC’s share price dropped 8%, its largest decline since the 2020 COVID-19 sell off, after the bank posted an 80% drop in quarterly profit and a USD3bn charge to the value of its stake in China's Bank of Communications. This was even though it posted a 78% YoY growth in pre-tax profit for 2023 (USD30.3bn), boosted by the sale of its French retail business and higher interest rates during the year. The Chinese real estate meltdown also forced HSBC to book additional provisions of USD200mn in the quarter to cover potential losses; however, given a potential stimulus by the government, the overall negativity about the region may be overdone.
Over the last several years, HSBC has been pivoting its business increasingly towards the faster-growing markets of Asia where the bank has the majority of its operations, generating almost 50% of its revenues. Disposals of businesses in Canada and France have been replaced by acquisitions of Asian wealth management and insurance assets, in a region with a growing rank of high net-worth clients. The IMF expects significantly higher China GDP growth in 2024 (4.6%) compared to only 2.1% in the US, regardless of the ongoing concerns around “benign” China demand.
HSBC has also guided to NII of USD41bn+ in 2024, implying approximately 15% YoY growth, driven primarily by loan growth and deposit migration to Hong Kong and, given expectations of lower interest rates, non-interest related income from the likes of the Wealth and Personal Banking division is expected to play a greater role in achieving the bank’s target of mid-teen ROTE. An additional upside risk to HSBC meeting its targets is a further delay to rate cuts as a result of persistent inflation.
With the stock trading at an 8% discount to its long-term P/B and 3M ATM volatility at 3YPc5, we suggest buying June 24 660 calls at a cost of 0.6% of underlying (spot ref: 607). Should the spot price rise 8% to the 5 year high of 660 the strategy would return c.2.7x on the premium employed.