Credit markets widened last week on the back of a weaker macroeconomic backdrop, increased trade tensions between the US and China, and political turbulence in the UK and Italy. This was exacerbated by the escalation of protests in Hong Kong, which in particular led to a sell-off in HSBC debt: 5-year senior widened about 10bps, while AT1’s fell on average 1% – more than double the wider market.
This market reaction is understandable. Despite being a global bank, in the first half of 2019 Hong Kong represented 52% of HBSC group’s pre-tax profits (and over 90% of profit before tax in its retail/wealth-management operation), making it significantly more exposed to Hong Kong than global peers such as JP Morgan and Citigroup.
There are also wider strategic concerns. The bank wants to expand and tilt towards mainland China, while still maintaining its European/US operations and a large USD clearing business. If global trade tensions continue to worsen this would become more challenging. The recent departure of the group CEO (as well as the head of Greater China) adds to the uncertainty. Finally, due to its large deposit surplus, HSBC is generally seen as a relative beneficiary of higher US rates, which are now unlikely to come through following the Fed’s recent action and messaging.
HSBC’s credit fundamentals nevertheless remain robust, with solid balance sheet ratios. In Hong Kong (about 30% of total lending), asset quality metrics look very strong and the average mortgage loan-to-value ratios are below 40%. The bonds have recovered some ground in recent days, and we would view any renewed widening as an opportunity to add to exposure.
Kames Capital holds bonds from HSBC in its fund range.