HSBC Holdings PLC - Serving Over 40 Million Customers, with an Increase in Customer Lending, Customer Accounts and Strong Growth

HSBC Holdings Plc (LON: HSBA) is a banking company. The company provides retail banking, commercial banking, global banking & markets, and global private banking. HSBA offers various banking products and services across the geographies.

On 3^rd August 2020, the company will release its Interim Results 2020.

Recent News
On 4^th May 2020, the company, through its subsidiary HSBC Insurance (Asia) Limited, announced that it had entered into a contract to acquire the remaining 50 per cent stake in life insurance (HSBC Life Insurance Company Limited (HSBC Life China)) joint venture in China, from The National Trust Limited.

Strength of the Group in the Near Term
In RBWM (Retail Banking and Wealth Management), the group continued organic growth in the customer base, with more than 100 thousand additional active customers in Q1 FY20. In GPB (Global Private Banking), the revenue surged by 13 per cent, primarily from progress in investment and lending revenue in Asia and Europe, led by high volatility in equity markets. In RWA, the company expect mid to high single-digit percentage growth in the year 2020. The group enhanced support for customers through digital channels and also showed a good volume growth; customer accounts increased by $118 billion in the current quarter; loans and advances to customers increased by $64 billion.

First Quarter of 2020 (as on 28th April 2020) - Reflecting Good Volume Growth and Loans & Advances to Customers Increased
During the first quarter of 2020, the reported profit before tax was down by 48% to $3.2 billion, and adjusted profit before tax decreased by 51% to $3 billion as compared with the corresponding period of the last year. The profits were impacted by Covid-19 and fall in oil prices. Led by adverse valuation adjustments in GB&M (Global Banking and Markets) and adverse market impacts in life insurance manufacturing, the reported revenue reduced by 5% or $0.7 billion to $13.7 billion against the same period last year (Q1 FY19: $14.4 billion).

Net interest margin (NIM) for Q1 FY20 was 1.54%,a decrease of 5 basis points (bps) from Q1 FY19 and 2 basis points (bps) from Q4 FY19. Customer lending rose by 4% against the Q4 FY19. Customer accounts increased by $47 billion in Q1 FY20 versus Q4 FY19.

Share Price Performance

Daily Chart as at May-06-20, before the market closed (Source: Refinitiv, Thomson Reuters)

HSBC Holdings PLC’s shares were trading at GBX 403.15 before the market close (at 2:14 PM GMT+1) on 6th May 2020 and were up by 0.49% versus the previous day closing price. Stock 52 weeks High and Low are GBX 674.80 /GBX 387.65.

Valuation Methodology


Conclusion
The company has faced challenging economic conditions in March 2020. In Q1 FY20, the elevated adjusted ECL (expected credit loss) charge stood at $3.0 billion against the Q1 FY19, mainly due to the effect of Covid-19 and weakening oil prices on the forward economic outlook. The company looks promising and remains attractive to invest for the long term. The group has a strong growth in both lending and customer accounts. The balance sheets stayed resilient, with a CET1 ratio of 14.6 per cent. The group also reported a robust funding and liquidity position with LDR (Loan-to-deposit ratio) of 72.2% and LCR (Liquidity coverage ratio) of 156%. 

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX  401.20 (as on 5^th May 2020) with lower double-digit upside potential based 0.62x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

Virgin Money UK PLC – Serving 6.4 million Customers, with Strong Liquidity Position

Virgin Money UK Plc (LON: VMUK), formerly called as CYBG PLC, is a financial services company that indulges in the business of providing solutions in the space of financial services as well as banking.

On 4^th August 2020, the company will release its Q3 Trading Update.

Financial Highlights (for the six months ended 31 March 2020) - Balance Sheet Mix Optimisation, with Loan Growth and Deposit Growth

The company reported deposit growth of 1.4 per cent to £64.7 billion and loan growth of 0.3 per cent to £73.2 billion.Business lending growth was of 5.7 per cent in H1 to £8.3 billion, and Personal lending growth was of 6.2 per cent to £5.3 billion. NIM (net interest margin) in H1 period stood at 1.62 per cent, which remained within guidance range (Q2: 1.63%). The company also stated that asset mix benefits more than counterbalanced the mortgage impact in H1. Led by the expected NIM compression, the pre-provision operating profit decreased by 3% to £352 million against the same period last year. On a YoY basis, the underlying profit was down by 58% to £120 million (H1 2019: £286 million), driven by a COVID-19 impairment charge. The group delivered good progress on PPI (payment protection insurance) processing. Led by higher RWAs from a planned mortgage model change, CET1 ratio decreased by 0.3% pts to 13% in H1 FY20.

Share Price Performance

Daily Chart as at May-06-20, before the market closed (Source: Refinitiv, Thomson Reuters)

Virgin Money UK PLC’s shares were trading at GBX 76.04 before the market close (at 3:29 PM GMT+1) on 6th May 2020 and were up by 6.65% versus the previous day closing price. Stock 52 weeks High and Low are GBX 222.10 /GBX 46.10.

Valuation Metrics

(Source: LSE)

As on 31st March 2020, the Price to Book multiple of the VMUK was 0.2x and the same multiple was lower as compared with the Banking industry. It is reflecting that the company is trading at a lower multiple as compared to its peers.

Conclusion
In a tough market, the group’s performance has also stayed on track. However, the company continue to emphasis on supporting the clients, meeting the medium-term financial targets and delivering on the strategic priorities. The Bank is delivering growth in client balances across personal and business and attracting relationship deposits. Implementation of the Basel III framework continues, seeking to improve the comparability of capital ratios, with changes to the standardised approach to credit risk, operational risk and the introduction of an RWA output floor. MREL implementation also continues, with financial institutions busy issuing qualifying debt to meet their requirements. Preparations are also underway for the Group’s inaugural participation in the Bank of England’s Annual Cyclical Scenario (ACS) exercise in 2020. VMUK is enhancing at pace with the proposals to introduce exciting and new Virgin Money products for business and personal clients throughout 2020. Although the full impact from the COVID-19 outbreak will take time to emerge.

Based on the decent prospects, we have given a “HOLD” recommendation at the closing price of GBX 71.30 (as on 5^th May 2020).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*The “Buy” recommendation is also valid for the current price as covered in the report as on 6^th May 2020.

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