How China weighs on HSBC’s earnings

HSBC will report its first-quarter earnings at the end of this week, but analysts believe that they already know what to expect. And it’s all because of China.

Over the past few years, HSBC has shifted its focus towards the East, building up its Asian presence and expanding its presence in China, in particular.

This is not wholly surprising – after all, HSBC stands for the ‘Hongkong and Shanghai Banking Corporation’. But having once positioned itself as a truly global banking brand, the HSBC group is now returning to its roots.

In 2007, HSBC became one of the first foreign banks to become incorporated in mainland China, and as of this year, more than 50 per cent of the bank’s earnings come from the Asian marketplace.

While this Asian exposure has helped to shield HSBC from the market volatility that has rocked UK, US and EU-based banks in recent years, it also comes with a downside.

China is a notoriously private economy, but it is clear that the county’s growth rate is slowing. In 2007, when HSBC entered the marketplace, China’s GDP was at an impressive 14.2 per cent. But just ten years later, in 2017, GDP had fallen to just 6.9 per cent. While this certainly outpaced the UK’s 2017 GDP (1.8 per cent), any economic slowdown represents a cause for concern among investors – particularly if those investors were seeing double-digit GDP growth just a few years earlier.

In a recent note to clients, analysts at Credit Suisse warned that HSBC’s first-quarter results could be at risk due to “weak capital markets”, with this weakness primarily driven by Brexit-based volatility in the UK, and lower than expected growth in China.

During the presentation of its 2018 full-year financials in February of this year, HSBC’s chief executive John Flint warned on the impact of the US-China trade war, and the overall slowing of China’s economy.

The bank missed its profit target for the fourth quarter of last year, with a pre-tax profit of $3.26bn for the three months ending 31 December 2018, down from $5.33bn in the previous quarter.

Clearly China has a significant and ongoing role to play in HSBC’s portfolio performance. If you want to predict HSBC’s future earnings, just look to China and work backwards from there.