Interactive Investor

How big yielder HSBC smashed forecasts

4th May 2017 14:04

Lee Wild from interactive investor

A week after London-listed peers published their quarterly results, HSBC has made public its numbers for the first three months of 2017. And they were worth the wait. After a terrible set of results in February, the lender beat expectations at both the top and bottom line, shoving the share price up as much as 4% to a seven-week high.

Adjusted pre-tax profit, which strips out currency moves and one-off items, jumped 12% year-on-year to over $5.9 billion versus consensus estimates for little change. Revenue of $12.8 billion was around $400 million better than forecasts.

HSBC's global banking and markets business ramped up earnings by 35% to $1.7 billion – "a great quarter," according to chief executive Stuart Gulliver – while higher US interest rates gave both retail and commercial banking and boost.

Progress on costs was less impressive, but impairments of $0.2 billion surprised on the low side, and, crucially, the common equity tier 1 (CET1) ratio – a key measure of a bank's financial strength – increased to 14.3% from 13.6% at the end of 2016.

"We currently expect the 2017 dividend to be marginally uncovered, but given the scrip component and a Q1 2017 CET1 capital ratio of 14.3%, we are not remotely concerned," writes Investec Securities analyst Ian Gordon.

"We expect a 51c dividend to be maintained through 2017-2019 - a prospective dividend yield of 6.1%."

While there's no mention of further share buybacks - HSBC just completed a $1 billion programme - David Lock, an analyst at Deutsche Bank, thinks the size of the capital beat will raise expectations of further buybacks in the second half. He pencils in $2.5 billion for the whole year. Look for confirmation at second-quarter results in August.

Clearly, there's lots to like about the numbers, and an improvement in tangible net asset value (TNAV) to $7.08 puts HSBC shares on 1.2 times. As we said in February, not cheap. Neither is that forward price/earnings (PE) ratio of 13.6 based on Deutsche Bank earnings per share forecasts.

But that dividend remains a big draw and is why many analysts tip the shares as a 'hold' albeit with price targets at a small discount to the current market price.

Looking at the technicals, there's potentially resistance at around the 670p level, the upper line in a downward trend triggered by those "ugly" results in February. Possible support doesn't kick in until either the 62% Fibonacci retracement of the decline from post-Credit Crunch highs in May 2013, at around 632p, or the lower trend line, currently at 610p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.