Pre-tax profits for the three months to 31 March were $3.2bn compared with $6.2bn a year ago, after the bank increased its charges for expected credit losses and other impairments from $0.6bn to $3bn.
Most of the increase in charges was due to the slowdown in global economic activity due to the coronavirus, but the bank also flagged ‘weakening oil prices on the forward economic outlook and a significant charge related to a corporate exposure in Singapore.’
HSBC is one of the main lenders to Singapore-based oil trading firm Hin Leong, which collapsed with billions of dollars of debt earlier this month due to the sudden fall in crude prices.
However, weakness in oil prices was also cited by major US banks such as Citigroup and Bank of America as a reason for increasing their loan-loss provisions as many small oil producers risk breaching their banking covenants with crude prices at current levels.
HSBC also reported a surge in loans and deposits as corporate customers drew down new and existing credit lines and re-deposited them in order to increase their cash balances.
Lending increased by $41bn in the quarter while deposits increased by $47bn, creating an excess of over $400bn in deposits versus loans.
Looking ahead, the bank sees more pressure on its revenues due to lower corporate activity and continued low interest rates, while provisions for credit losses could rise to as much as $11bn over the full year.
However, for the time being it is keeping its medium-term financial targets and its dividend policy which is likely a factor in today’s muted share price reaction.
Analysts at Killik & Co describe HSBC as ‘an attractive global bank, given its increasing focus on Asia, which is over 50% of group revenue, and its strong global network for multinational banking,’ adding that it has ‘sufficient excess capital and liquidity resources to weather the COVID-19 storm.’
Investment bank Goldman Sachs also re-iterated its Buy recommendation on the shares with a target price of 745p.
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