4Q23 results slightly lower than our expectations
HSBC announced 4Q23 results: Under the adjustment, the company's revenue in a single quarter, profit before provision, and profit before tax changed by 6%, -1%, and 4% year-on-year respectively, and increased 21%, 39%, and 41% year-on-year respectively. 4Q23 profit before tax adjustments fell slightly below our expectations, mainly due to net interest spreads and operating expenses falling short of expectations.
According to the report, HSBC's net loss for 4Q23 was US$200 million, a year-on-year decrease of US$4.5 billion, mainly due to special events of US$5.8 billion.
We believe that the negative stock price reaction after the disclosure of HSBC's results came mainly from four aspects: 1) 4Q23 net interest income fell short of market expectations and the 2024E guidelines were conservative; 2) 4Q23 operating expenses fell short of market expectations and the 2024E guidance costs were high; 3) Bank of Communications concerns about impairment; 4) the company did not provide guidance on 2025E and longer term performance.
Development trends
Special events and high inflation in Argentina disrupted the company's results this quarter. 4Q23 profit before tax was affected by a total of 5.8 billion US dollars of special events. The three main effects were: 1) loss of sales of US$2 billion in French retail business; 2) loss of sale of US$400 million bonds; 3) Bank of Communications impairment of US$3 billion. The first two were fully guided by 3Q23, and the third was beyond market expectations. Additionally, the company's pre-tax profit was negatively affected by the $500 million hyperinflation in Argentina.
HSBC's net interest income and net interest spread for 4Q23 fell short of our expectations. 4Q23 The company's banking net interest income (Banking NII) was US$10.7 billion, down 7% from the previous month; the net interest spread was 1.52%, down 18 bps from the previous month; we estimate the net interest spread from banking business to 1.96%, down 17 bps from the previous month. Let's take a closer look:
4Q23 disruptors: The 4Q23 company's $10.7 billion Banking NII included $500 million in negative effects from Argentina's hyperinflation and $300 million in accounting adjustments from cash flow hedging revenue recognition. (Subsequent text)
Profit forecasting and valuation
As the company's net interest revenue and cost performance fell short of our previous expectations, the 2024E profit forecast was lowered by 5.7% to US$25.611 billion, and we introduced the 2025E profit forecast of US$19.044 billion. The current stock price corresponds to 0.8 times the 2024E net market ratio and 0.8 times the 2025E net market ratio. We believe that although the company's current performance falls short of market expectations, the company's capital situation is good, and the logic of high shareholder returns remains unchanged. We expect 2025E's ROTE to remain at 12%, and dividends and share repurchases are sustainable. The outperforming industry rating and target price of HK$76.5 remain unchanged, corresponding to 1.0 times the 2024E net market ratio and 1.0 times the 2025E net market ratio. There is 27.0% upside compared to the current stock price.
risks
Interest rates fell more than expected, and credit costs rose due to weakening macroeconomics in core markets.