James suspects the blow to revenues this quarter has more to do with timing than fundamentals. Specifically, he believes its compliance with the total loss absorbing capacity (TLAC) requirements placed on the bank after the financial crisis of 2008 is chiefly to blame for the “drag on profitability.”
“HSBC issued $30bn in senior debt to meet the TLAC mandate in the fourth quarter, ahead of time, but while that is just sitting in money markets, they have to pay the coupon on that debt so get nothing back. That has been a big drag on profitability of the company. Had the US yield curve steepened more than it has now, this would have been less of an issue for them.”
James reckons that a steeper yield curve in the US will translate into an extra 25% in profits for the bank. “It is only a matter of time before this happens. It already started to happen in the fourth quarter of last year. And HSBC mentioned in its results that its sensitivity to interest rate movements has increased, which means they will feel the benefit more strongly than they have in the past. That is why I’m not quite as bearish as others are today.”
And relative to the other major British banks, James argues that HSBC’s Asian footprint will “over the mid-term give investors a higher growth rate than Lloyds and RBS.”
Looking ahead, HSBC expects to benefit from its ties to emerging economies, which it views as the primary drivers of incremental growth globally. But the bank acknowledged that this growth could be compromised from European populism and aggressively protectionist measures from the new US administration.
If those headwinds are more muted, however, “the bank’s focus on the far east could be its trump card if the Chinese economy starts to fire on all cylinders,” said Khalaf.
