Behind HSBC's 10% October Rise

HSBC shares climbed in early October before acquiring Citi's consumer wealth business in China. But it has lost a bit of momentum after a couple of weeks.

An Attractive Proposal?

HSBC's prominent presence in China has kept its share price under pressure, particularly given its exposure to the Asian giant's real estate sector. However, in its last earnings, the bank reduced its exposure to China's commercial real estate market to $14.3B from $19.8B in the prior year. That does represent the entirety of its quarterly net interest income (NII) for a sense of proportion of the level of risk. As such, HSBC's P/E ratio is at a mere 5.60 compared to the average of 10 for the banking industry, leading to the bank being cited often in lists of undervalued stocks.

But the poor performance in China hasn't stopped HSBC from going on a shopping spree, in part taking advantage of other banks' unwillingness to face the prospect of a slow recovery in Asia and uncertainty in the property development sector in China. In early October, HSBC bought Citi's retail wealth management portfolio, which holds around $3.6B in assets. The parallel sale of HSBC's Canada unit to RBC, which is still being reviewed by regulators and has opposition from key figures in Canada's Parliament, seems to suggest that the London-based bank is doubling down on its China presence.

Bounce, and Then What?

Despite the ongoing uncertainty in China, where recent stimulus moves by the government to prop up the housing sector haven't led to much in the way of recovery, HSBC was notably upbeat about its outlook when it last reported to the market. Thanks to rising interest rates worldwide, it even raised its guidance for NII. Unlike US and European competitors, HSBC hasn't significantly increased its provisions since it already had a capital ratio of over 14% (it rose just 0.5bbps since last year). This allowed HSBC to more than double its EPS since the prior year.

Still, the real estate situation in China remains a concern after a second major developer, Country Garden, failed to pay a bond payment on Thursday, opening it to falling into default. HSBC's interim outlook statement acknowledged that it needed to "monitor" the real estate sector in China and cut costs. But that doesn't mean cutting its support to investors, as the bank promised to buy back up to $2.0B in shares in the latter half of the year. The outlook section provided short-term concern but long-term optimism.

HSBC in Rising Wedge

The share price of HSBC HLDGS resembles an ending wedge pattern, pending one more leg up. A rising wedge contains three peaks and two troughs, with the last peak expected to reach the upper trendline of the ending pattern. The 138.2% Fibonacci expansion of the 280-567 leg may be one of the levels to focus on, near 675. If bulls lose the second trough at 575, the chances of sliding to 512 will increase, invalidating the pattern.

Source: SpreadEx

Key Takeaways

HSBC rose some 10% recently ahead of its acquisition of Citi's consumer wealth business in China, but momentum has slowed. Despite challenges in China's real estate sector, HSBC has reduced its exposure, has a low P/E ratio and appears committed to China. The bank remains optimistic about its outlook, with rising interest rates boosting its earnings. Despite plans to monitor the sector while cutting costs and supporting investors through share buybacks, concerns over the Chinese real estate market persist.