HSBC Holdings PLC – Serving More Than 40 Million Customers, with Good Volume Growth and Enhanced Support for Customers Through Digital Channels

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

First Quarter of 2020 (as on 28^th April 2020) - Reflecting Robust Levels of Capital, Funding and Liquidity

(Source: Q1 Results, Company Website)

For 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 down 5 basis points (bps) from Q1 FY19 and 2 basis points (bps) from Q4 FY19. Customer lending increased by 4% against the Q4 FY19, mainly due to increased term lending in CMB (Commercial Banking) and GB&M, notably in March as corporate and commercial customers drew down on committed facilities. Customer accounts increased by $47 billion in Q1 FY20 versus Q4 FY19, in part driven by the impact of Covid-19, including funds deposited following loan draw downs. The group has a strong growth in both lending and customer accounts. The balance sheets stayed resilient, with a CET1 ratio of 14.6%. 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%.  

Share Price Performance

Daily Chart as at April-28-20, before the market closed (Source: Thomson Reuters)

HSBC Holdings PLC’s shares were trading at GBX 414.70 before the market close (at 10:53 AM GMT+1) on 28^th April 2020 and were down by 0.38% versus the previous day closing price. Stock 52 weeks High and Low are GBX 687.70/GBX 387.65.

Growth Catalysts
The company expect mid to high single-digit percentage RWA growth in 2020, primarily due to credit rating migration. 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 increased by 13%, mainly from growth in investment and lending revenue in Asia and in Europe, driven by high volatility in equity markets.

Conclusion
In Q1 FY20, the elevated adjusted ECL (expected credit loss) charge was up by $2.5 to $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 group showed a good volume growth and enhanced support for customers through digital channels; loans and advances to customers increased by $64 billion and customer accounts increased by $118 billion in the current quarter. As a result of the substantially worsened outlook for the world economies, HSBA is now expecting a materially changed outlook for the bank for FY20 as set out in the outlook statement. The company has faced challenging economic conditions in March 2020. However, the business showed resilient performance. The company looks promising and remains attractive to invest for the long term.

Based on the above rationale, we have given a “Hold” recommendation at the current price of GBX 409.10 (as on 28th April 2020, before the market close at 8:15 AM GMT+1).

Burford Capital Ltd – 10-Year track record of profitability and Client Success, with Strong Balance Sheet

Burford Capital Ltd (LON: BUR) is the provider of funds and investment management services to the legal market.

Financial Highlights (for the year ended 31 December 2019) – Reflecting the Continued Expansion of the Business, Continued Rapid Growth, Strong Cash Generation, and Consistent Returns


(Source: Final Results, Company Fillings, LSE)

The company has almost $1.6 billion in 2019 commitments to drive future deployments, realisations and income. In 2019, the company generated over $1 billion in cash, with $518 million on its balance sheet. In balance sheet core litigation finance portfolio, the return on invested capital for FY19 surged to 93% from 85%. In FY19, the total income decreased by 15% to $357 million as compared with the previous year (2018: $420 million). In FY2019, the adjusted operating profit was decreased by 21% to $279 million, operating margin stood at 78% and profit after tax was reported at $226 million. On 31st December 2019, the total assets under management stood at $2.9 billion.

Share Price Performance
 
Daily Chart as at April-28-20, before the market closed (Source: Thomson Reuters)

Burford Capital Ltd’s shares were trading at GBX 515.30 before the market close (at 11:34 AM GMT+1) on 28^th April 2020 and were up by 26.64% versus the previous day closing price. Stock 52 weeks High and Low are GBX 1,795.00/GBX 250.43.

Valuation Methodology


*Peers: Arrow Global group Plc, Provident Financials Plc, Close Brothers Group Plc, and Jupiter Fund Management Plc.

*Currency Exchange Rate for 1USD = 0.800071 GBP.

Valuation Metrics

(Source: LSE)

As on 31st March 2020, Price to Book multiple of the BUR was around 0.9x, which were lower as compared to the industry multiples. It reflects, shares are undervalued against its peers.

2020 Portfolio Progress
On 3^rd February 2020, the company stated that it had attained litigation successes, which would generate unrealized gains. The group would generate over USD 100 million in balance sheet income and over USD 150 million in Group-wide income. In the first four months of 2020, Burford reflected a strong financial position in group-wide income and balance sheet income. The group had several significant case successes in the first four months of 2020.

Conclusion
The company had shown decent financial performance in the financial year 2019. However, the investor confidence remained dented. The group is declaring a plan to seek a dual share listing in the United States, while it responded by restructuring the Board.  Further, Burford has continued to improve and increase the transparency of the disclosure. Burford Capital Ltd is continuously investing in growing its operations and is planning to expand its product offerings in the near future.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “HOLD” recommendation at the closing price of GBX 406.90 (as on 27^th April 2020).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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