News & Analysis

HSBC's incredible Q1 profit knocks rivals into a cocked hat... and creates a trading opportunity

Andrew Saks, Tuesday, 27 April 2021

Despite HSBC's rather banal utterance last week that its Tier 1 FX dealing and global investment banking head office in London's world-dominating financial district of Canary Wharf is switching to a hot-desking model, it is very clear that the world's sixth largest Tier 1 interbank trading dealer by market share is in a strong fiscal position.

HSBC's first quarter earnings for 2021 has bucked the trend experienced by most Tier 1 banks which have made some unpleasant losses including that experienced by Credit Suisse whose fortunes were turned upside down by its involvement in the Archegos hedge fund demise.

Astonishingly high profits were declared by HSBC this morning, which showed an 84% increase in pre-tax profit compared with the pre-lockdown beginning of last year.

That is truly remarkable when considering the number of defaults that have taken place on the Bounce Back Loans that the government encouraged all enterprises that were heavy-handedly shuttered by the state in March last year, a scheme in which no underwriting took place, and funds were transferred to business unable to open their doors, however these funds came in the form of repayable bank loans, perish the thought that a government ordering businesses to close would actually take responsibility for such a decision.

Thus, the responsibility for repayment now lies with Britain's cash-strapped businesses leaving tremendous risk for the banks, despite the government backing of the loans.

Even though this hangs over the metaphorical heads of the banks, an 84% increase in Q1 profits is remarkable, thus HSBC's share price has risen 2.5% during the course of the day.

HSBC CEO Noel Quinn today played down the successful results, modestly admitting "We are pleased with our revenue and cost performance, but particularly with our significantly lower expected credit losses."

Indeed, HSBC is a major force within London's capital markets economy, however a very important point to note is that the bank has, ever since its establishment in 1865, been a major financial markets force in the Asia Pacific Region.

Launched as the Hong Kong and Shanghai Bank in the British colony of Hong Kong over 156 years ago, the bank is an issuer of tender, and has massive Tier 1 interbank dealing remits across the global financial markets centers of Hong Kong and Singapore today.

Both of those regions are lockdown-free, and to say that their economies are vibrant is an understatement. Singapore is the world's third largest FX interbank dealing center after London and New York, and is a bastion of efficiency, connected to global markets by Equinix, the same hosting firm that connects all of London and New York's trading venues to the live markets.

This morning, some of London's analysts made their opinions known, floating the thought that HSBC stock may rally higher forthwith.

Long-term investors appear to be buying ahead of the potential increase in HSBC stock, with the assumption in mind that the second quarter of 2021 may reveal similarly strong profits for the bank.

Net interest margins may well have decreased, resulting in reducing the profit the bank makes between lending and deposit, however, as with most Tier 1 giants, retail banking is not their core business. FX trading and OTC liquidity is - and that is where the current market is doing well due to a return to some degree of volatility.

Hot desking they may be, but the few traders who work at the company's Canary Wharf dealing center have done well this last quarter. Perhaps investors in shares in the bank will be grateful for this tenacity.

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