It’s tough to be a fan of foreign banks right now. And being bearish right now you run the risk of being the last guy in the door. The truth is, if you were bearish on foreign banks six months ago, very little has changed in the fundamentals to change that view. If you’re talking about banks with European or Chinese exposure, I’d argue that the fundamentals have gotten worse, not better. Deteriorating credit conditions and the prevalence of bad loans on the books to go along with negative rates in places like Europe aren’t exactly perfect conditions for the banking business.
That’s why I’m still looking for further downside on today’s “Bear of the Day” HSBC Holdings (HSBC – Analyst Report). HSBC Holdings plc provides banking and financial products and services. It operates through four businesses Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, and Global Private Banking. The company operates through approximately 6,100 offices in Europe, Asia, the Middle East, North Africa, North America, and Latin America.
Analysts have dropped their current year earnings estimates over the last 30 days. The bearish sentiment has seen our Zacks Consensus Estimate drop from $4.15 to $3.87. A big reason for the concern is HSBC’s exposure to Asia. About 40% of HSBC’s loan portfolio is derived from Asia. Asia’s general link to commodity prices are worrying an investor base here as the currency headwind has gone from strong to stronger over the last several weeks.
HSBC is also headquartered in London and does a ton of business in Europe. Any concern over a “Brexit” or continuing troubles in the Euro area could negatively impact the stock. I want to make something perfectly clear here. I understand I’m giving a bearish outlook on HSBC stock here but I am not implying anything negative about their solvency or the strength of their balance sheet. All indications point to HSBC being in a strong financial position with capital ratios that are inline to meet future and current regulatory levels.
Their full-year EPS was just reported below expectations on lower revenue and higher loan losses. This trend should be disturbing to shareholders, although HSBC did a good job of smoothing this out by upping their special once a year dividend to $1.05 from last year’s $1.00.