HSBC Holdings plc (“HSBC”) plans to issue a new SGD Additional Tier 1 (“AT1”) perpetual securities at the initial price guidance (“IPG”) of 5.25%. The new notes are expected to be issued on 24 March 2025, with the first call date on 24 September 2030. If uncalled, the coupon will reset based on the prevailing 5-year SORA-OIS rate and a resettable security margin.
HSBC is one of the world’s largest banking and financial services organisations, serving around 41 million customers across 58 markets. With total assets of about USD 3.0 trillion as of 31 December 2024, HSBC has approximately 211,000 full-time equivalent employees across the globe. Late last year, we saw the succession of the Group CEO by Mr. Georges Elhedery, who subsequently called for significant restructuring and re-organisation across the Group. Notably, HSBC’s business divisions have been restructured into (1) Corporate and Institutional Banking, (2) International Wealth and Premier Banking, (3) Hong Kong and (4) UK – making the Group simpler and focused on driving continued growth.
For the recent credit update on HSBC’s FY24 financial results, do refer to our article here: Idea of the Week – Another year of record for HSBC.
For the full year ended 31 December 2024 (“FY24”), HSBC continues to see stellar performance with both revenue and profit before taxes (“PBT”) growing year-on-year (“YoY”). Revenue rose slightly by +1% YoY, up from USD 64.9b in FY23 to USD 65.9b in FY24, whereas PBT rose +6% YoY, up from USD 30.3b to USD 32.3b. Excluding the notable items across both years and comparing on a constant currency basis, HSBC reported PBT growth of +4% YoY to USD 34.1b.
Banking net interest income (“NII”) remains a key source of revenue for HSBC, which stood relatively resilient amidst interest rate pressure across the year. HSBC’s reported banking NII was largely flat at -0.8% YoY and -0.3% excluding the notable items. We believe that the increased position in the structural hedge over recent years has helped to provide a strong buffer for the banking NII, greatly reducing the sensitivity to interest rate cuts. HSBC reports a drop from USD ~7b (June 2022) to USD ~2.9b (December 2024) banking NII sensitivity for a 100 basis points (“bps”) down-shock.
HSBC’s loan portfolio continued to see a reduction of exposure to Hong Kong and Mainland China, particularly with commercial real estate (“CRE”) exposure falling by -15% and -30% YoY respectively (as of 4Q24). Additionally, we noted that the expected credit losses associated with Mainland China CRE have remained low across FY24, which reflects well on HSBC’s efforts to manage the portfolio. Overall, we expect minimal concerns arising from HSBC’s exposure to Hong Kong and Mainland China currently.
For HSBC’s capital and solvency profile, we see a strong capital position with the Common Equity Tier 1 (“CET1”) ratio at 14.9% as of 31 December 2024 and a 380 bps buffer to regulatory requirements. Despite relatively significant dividend payouts and share buyback schemes announced, these have been backed by HSBC’s capability to generate profits – allowing the CET1 ratio to maintain at current levels. With the capital redistribution plans requiring approval from the regulatory authority and a substantial buffer at the moment, we do not see a cause for concern for any material decline in HSBC’s CET1 ratio.
HSBC still holds a robust liquidity position, with liquidity coverage ratio and net stable funding ratio at 138% and 143% as of FY24 respectively. High-quality liquid assets (“HQLA”) were stable across the year, from USD 648b as of December 2023 to USD 649b as of December 2024. HSBC indicated that there is another USD ~140b worth of HQLA available that is not taken into the LCR calculations (covering ~48% of the total deposits).
Table 1: SGD Additional Tier 1 bonds
|
Issue |
Ask Price |
Yield to Call |
Years to Call |
Bond Credit Rating (S&P/Fitch) |
|
106.10 |
5.24% |
3.25 |
N.R/ BBB- |
|
|
107.65 |
5.01% |
2.50 |
N.R/ BBB- |
|
|
103.30 |
4.85% |
4.37 |
BBB-/ BBB+ |
|
|
103.30 |
4.69% |
2.95 |
BBB-/ BBB |
|
|
104.20 |
4.61% |
4.76 |
N.R/ BBB- |
|
|
102.10 |
4.58% |
4.24 |
N.R/ BBB |
|
|
103.00 |
4.56% |
4.51 |
BB-/ BBB- |
|
|
HSBC Perpetual Corp (SGD)* |
100.00 |
5.25%* |
5.50* |
N.R/ BBB |
|
Sources: Bondsupermart, iFAST Compilations. Data as of 18 March 2025. *Yet to be issued. Final price guidance is likely to be adjusted downwards. |
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At the IPG of 5.25%, HSBC’s new AT1 paper appears rather attractively priced. It compares well against its own HSBC 5.250% Perpetual Corp (SGD) with a yield to call of ~4.6%. Against peer options, the higher yield more than compensates for the slightly longer years to call, while having one of the better credit ratings among the European bank AT1 papers. That being said, we expect final price guidance to adjust considerably downwards from the IPG of 5.25%, especially given HSBC’s popularity and likely strong demand in the SGD debt space.
We wish to highlight the loss absorption features associated with AT1 banking bonds, with AT1 bonds being prioritised for loss absorption before Tier 2 subordinated and senior non-preferred bonds. As such, the new issuance would not be suitable for risk-averse or conservative investors.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in BACR 8.300% Perpetual Corp (SGD). The analyst who produced this report holds an NIL position in the abovementioned securities.
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