HSBC Holdings plc (“HSBC”) announced that it intends to issue a 10.5NC5.5 SGD Tier 2 subordinated bond at the initial price guidance (“IPG”) of 5.00%. The bond is expected to be issued on 12 March 2024, with a call/reset date of 12 September 2029 and a maturity date of 12 September 2034. If uncalled, the bond will reset at the prevailing 5-year SORA-OIS plus the initial margin as determined upon issuance. Do note that the new issuance is made available only to accredited and institutional investors.
HSBC is one of the world’s largest banking and financial services organisation, which serves an estimated 42 million customers across 62 countries and territories. Headquartered in London, HSBC has been building a global network of operations – with a particular focus on Asia in the foreseeable future.
For the full year ended 31 December 2023 (“FY23”), HSBC saw a record revenue and profit before taxes (“PBT”) despite significant impairments for 4Q23. Revenue stood at USD 66.1b for FY23, a jump from the USD 50.6b for FY22. The higher revenue was a result of growth observed in both net interest income (“NII”) and non-interest income, growing by 20% and 50% YoY respectively.
HSBC’s PBT saw an increase of 78% from the previous year, rising from USD 17.1b (FY22) to USD 30.3b (FY23). Notably, the PBT included gains of USD 2.5b from the sale of the Group’s retail banking operations in France and USD 1.6b provisional gain on the acquisition of Silicon Valley Bank UK, offset by the USD 3.0b impairment charge in their associate – Bank of Communications (“BoCom”).
The strong performance was further supported by good cost management and lower charges for the expected credit losses (“ECL”). Operating costs are down by -1% year-on-year (“YoY”), while HSBC guided for a further -5% decrease for FY24. For ECL, the total charges for FY23 fell by -5% YoY at 36 basis points (“bps”) of average gross loans and advances. HSBC expects the ECL to increase slightly to 40 bps in FY24.
For the quarter ended 31 December 2023 (“4Q23”), it was the worst-performing quarter for HSBC in 2023, given the impairments in this quarter. HSBC saw its PBT falling year-on-year (“YoY”) to USD 1.0b (4Q23), down from USD 5.0b (4Q22). Results for 4Q23 included a USD 2.0b impairment for France retail operations (with the sale completed on 1 January 2024) and a USD 3.0b impairment for BoCom. Additionally, HSBC saw a negative impact of USD 0.5b on its PBT owing to the significant devaluation of the Argentina peso, which had been introduced in December by the Argentinian government to address hyperinflation.
Despite the impairments in 4Q23, the outlook for HSBC continues to look optimistic. We largely expect the drags in 4Q23 to be one-off events. With a strong growth since FY22, and to be helped by further NII growth in FY24, we expect HSBC’s earnings to increase further moving forward.
Meanwhile, the credit profile for HSBC continues to stay resilient with its CET1 ratio standing at 14.8% as of 4Q23. Though it saw a slight moderation from 3Q23’s 14.9%, the strong performance across FY23 enabled the CET1 ratio to increase from prior year’s 14.2%. In 1Q24, HSBC expects an increase of about 70 bps in CET1 ratio after the sale of its Canada banking business, offsetting a decrease of 25 bps arising from share buybacks of USD 2b. HSBC intends to maintain a CET1 ratio of 14.0% to 14.5% in the medium term. Meanwhile, HSBC’s liquidity coverage ratio and net stable funding ratio are at 136% and 133% respectively as of 4Q23, well above the regulatory requirements of 100%.
HSBC is rated A-/A+/A3 by S&P/Fitch/Moody’s respectively, with a stable outlook across the three rating agencies. The new issue is expected to be rated BBB/A-/Baa1 by S&P/Fitch/Moody’s respectively. We wish to note that as a Tier 2 subordinated paper, the issuance comes with loss absorption features. As such, the new issuance might not be suitable for risk-averse investors.
Table 1
HSBC SGD Tier 2 issuances
compared against other banks
|
Issuance |
Ask Price |
Yield to Call/ Maturity |
Years to Call/ Maturity |
Bond Credit Rating (S&P/Fitch) |
|
100.11 |
4.97% / 4.96% |
5.01 / 10.01 |
BBB/ BBB+ |
|
|
101.82 |
4.79% / 4.85% |
4.47 / 9.47 |
BBB-/ BBB+ |
|
|
100.30 |
4.68% / 4.77% |
4.95 / 9.95 |
BBB+/ A- |
|
|
102.95 |
4.49% / 4.66% |
4.03 / 9.03 |
BBB/ A- |
|
|
103.68 |
4.48% / 4.69% |
5.06 / 10.06 |
BBB/ A- |
|
|
HSBC 12Sep2034 Corp (SGD)* |
100.00* |
5.00%* |
5.50 / 10.50* |
BBB/ A-* |
|
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. Data as of 5 March 2024. *Yet to be issued. |
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While BPCE and Lloyds might offer a slightly higher yield, we believe the higher credit rating on HSBC, as well as the bank’s larger size, justifies the yield on HSBC’s new issuance. On the other hand, investors ought to note that the final price guidance is likely to adjust downwards from the IPG. We feel that HSBC’s new Tier 2 paper can be a good consideration for those looking to invest in bank bonds, particularly with HSBC being a strong international bank with a stable credit profile.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in BNP 4.750% 15Feb2034 Corp (SGD) and HSBC 5.300% 14Mar2033 Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.
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