HSBC Earnings: China exposure now a drag

Rising covid cases and property market problems are possible headwinds that HSBC could bring up in its earnings that are overall expected to improve with higher interest rates.

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Like nearly all banks, HSBC was hurt by lower interest rates and the sharp downturn in economic activity in the middle of the pandemic, but has recovered alongside the Chinese and British economies and as rates begin to rise in the UK, though fall slightly in China.

China’s zero covid

As one of the few global banks with a significant presence in China, it offset some of the pandemic impacts as the mainland managed to keep case counts down. However, cases have been going up lately, and what might have been a strength could turn into a weakness during the first quarter.

Investors are likely to be very interested in the bank's contingencies for omicron after closing some floors of its HQ yesterday due to the spread of the virus. Particularly if the bank will maintain provisions, given the contingency. It should be noted that Q3's better than expected performance was partly due to releasing pandemic provisions, which could impact earnings going forward.

Evergrande exposure

While exposed to the Chinese market, HSBC isn't as involved in the housing industry as other banks. The bank disclosed $19.8B in property exposure at their last earnings. Traders are likely interested in any comment on further exposure and where it sees the market going.

Core banking is HSBC's largest source of revenue, and with interest rates rising in the UK and likely to move higher in other jurisdictions, that could handily offset losses in other areas. Likely there will be a focus on the outlook section to see how HSBC balances its cost projections in a higher inflation environment.

It's normal for banks to report seasonally lower earnings in the fourth quarter but the strong results and buybacks announced by Natwest have set expectations a little higher. .

Shares outperform street expectations

The shares of HSBC have gained nearly 30% in 2022 alone. The stock formed a base around its 2020 low, which has formed a near p[erfect double bottom with the 2009 low. The high-point of the base was 460p formed in May 2021. It broke out of the base with gusto this year and has barely looked back.

460p then 350 are the significant support levels to any pullback, while 610p then 770p are major resistance.

Source: Spreadex trading platform

Key takeaways

HSBC is expected to report improved earnings as China has kept case numbers to a limit, but not better than Q3. One risk factor is increasing covid cases in China, its biggest profit-making market. Whatever positive impact from BoE's hikes might be expected from Q4 could be offset if the situation deteriorates in China.

But the above is almost more of a consideration for investing in HSBC vs other banking names. Otherwise the British-Hong Kong bank looks set to benefit from the brighter macro backdrop of higher rates and faster growth.