HSBC takes multi-billion dollar provisions, and BP’s earnings suffer with worse to come

“The FTSE 100 shook off renewed weakness in oil prices, which hit heavyweight oil firms, and poor results from HSBC to trade modestly higher on Tuesday,” says Russ Mould, Investment Director at AJ Bell.

“Having briefly been lower at the market open, the index recovered to place the 5,900 mark in its sights. Investors are clearly still optimistic as several countries emerge from lockdown conditions.

“All the focus will now be on the extent of any increase in infections associated with these cautious steps back towards normality. These may take a couple of weeks to emerge and the markets may well remain in a nervy mood until then."

HSBC

“HSBC’s quarterly profit has almost halved after a surge in credit provisions to just over $3 billion, illustrating how the coronavirus pandemic is already having a nasty impact on the banking sector.

“In the Q1 reporting season in the US, the Big Four banks – Bank of America, Citigroup, JP Morgan and Wells Fargo – took $24 billion of provisions between them, the highest quarterly total since Q1 2010, when they were still staggering out of the credit crisis.

“Importantly, HSBC’s credit losses and impairment charge figure had already been trending up since early 2018, suggesting the global economy was slowing before the viral outbreak.

“HSBC’s balance sheet looks strong enough to get through the crisis but it isn’t going to be an easy ride.

“Its net interest margin had already been under pressure thanks to low interest rates, hot competition and modest growth.

“For Q1 2020 it fell 2 basis points to 1.54% and is likely to fall further in future quarters as HSBC stomachs the full impact of market interest rate reductions.

“It has also been hit by having relatively large exposure to the oil and gas industry at a time when the oil price has crashed. The commodity sector accounts for 2.5% of its loans.

“Ultimately HSBC is going to see profits slump, its transformation plan delayed and a group of very angry shareholders who are being denied a dividend while the value of their stock also falls. It’s an uncomfortable situation but not one that is unique to the bank.”

BP

“When BP boss Bernard Looney stepped up to the top job in February and, within days of taking over, announced plans to be carbon neutral by 2050 he must have felt he was meeting the company’s era-defining challenge head on.

“Sure there were grumbles about a lack of detail and questions over the credibility of the plan but he will have hoped to have done enough to address the growing concerns of institutional investors about climate change.

“Within a few weeks he has been forced to think again as the coronavirus has decimated oil demand, with today’s first quarter numbers just a prelude to even worse results through the course of 2020. After all, the full impact of lockdown conditions and the precipitous collapse in oil prices was only really felt from March onwards.

“The company itself describes the situation as unprecedented and yet it is keeping its dividend intact as it looks to cut spending, reduce costs and sell assets if it can. It is notable there is no commentary on whether the payout will be maintained through the course of the year.

“With BP’s balance sheet as strained as it has been in the best part of a decade there will be understandable nervousness about the fate of the dividend.

“When the company last faced a predicament on this scale – in the form of the Gulf of Mexico oil spill in 2010 – it was forced to suspend the dividend.

“Though that may have been in part a decision driven by the optics of doling out cash to shareholders when it was on the hook for meeting the clean-up costs of that disaster.

“In one sense that experience might give investors some comfort given BP has successfully faced down an existential crisis before, even if the circumstances are very different.”

These articles are for information purposes only and are not a personal recommendation or advice.