- Spot at long term resistance, overbought RSI 71 and at one of the lowest discounts to analyst target prices
- 19 Feb 4Q24 Results to determine price direction – Bullish: Restructuring/Buybacks - Bearish: Cost miss
- 6M ATM IV at 5YPc36 and Skew at 5YPc8 amidst agnostic price direction favour strangles
Revisiting our 29 February 2024 idea HSBC: China concerns potentially overdone – Long June 24 660 Calls, the stock has posted a 34% return since then as a result of strong earnings, buyback news and in anticipation of a prolonged higher rate environment. Although HSBC’s performance has been in line with that of the broader European banks (SX7P +33%), it is now trading at long-term resistance (Fig 2), overbought RSI 71 on the weekly and at a 4% discount to consensus target prices (Fig 4), one of the lowest in the sector. In terms of valuation, it is trading at 1.2x price to tangible book value, the highest multiple on a 5Y look back period (Fig 3).
The bank is due to report its 4Q results on 19 February, where analysts main focus will be on the new CEO's restructuring plan, and more specifically on the cost-saving initiatives and the expansion of the bank’s wealth division. In terms of the results, analysts’ 2025 earnings estimates have risen (Fig 5) in anticipation of a potential upgrade to the guidance on banking net interest income in 2025, due to a higher-for-longer rate environment, a higher contribution from reinvesting the maturing USD115bn in hedges, and the potential announcement of an additional share buyback of c.USD2bn on the back of strong profitability in 2H2024.
However, the market may be disappointed regarding its anticipation of the announcement of a USD3bn+ cost-cutting plan, while consensus cost growth of 2.6% for 2026 may also be too low, given the increasing competition for expensive Relationship Managers in its growing Wealth Management unit, (42% of group revenues). The bank has also previously missed on cost guidance post-COVID as cost growth in its core markets has been higher than blended inflation in those regions. In addition, stage 3 CRE loans in Hong Kong rose to over USD3bn from USD0.6bn in the 1H 2024, and given the excess property supply paired with only moderate rate cuts ahead, the group’s guidance of 30-40bp of credit costs may be at risk.
We anticipate a significant price move in the coming months as the stock is at a make-or-break point and given 6M ATM Volatility at 5YPc36 (Fig 7) isn’t particularly rich and Skew (90-110%) is at a 5YPc8 (Fig 6), we propose Long Jun25 720/920 strangles at a cost of 2.7% of underlying (Spot ref: 825, Fut: 805).