HSBC Bulls Bet on Stock Rebound Amid FCA Rigging Probe

Bullish bets on HSBC Holdings Plc (HSBA) are getting more popular on speculation the worst of its legal entanglements are over.

Calls to buy shares of Europe’s largest lender trade close to the highest level in almost three years relative to bearish puts, according to data compiled by Bloomberg on the Hong Kong-listed equities. The U.K. stock has rebounded 8.1 percent since hitting a 21-month low in July, posting its biggest monthly jump in a year. It slid 1.2 percent in London today.

Analysts predict HSBC will say next week that litigation costs more than halved in the first half of 2014 as the Financial Conduct Authority completes an industry probe on currency rigging and other misconduct. Britain’s markets regulator is accelerating talks with a group of banks that are being investigated, people with the knowledge of the matter said last month.

“The FCA in the U.K. is moving to wrap up inquiries,” Jared Woodard, senior equity-derivatives strategist at BGC Partners LP, said by phone. “People might be anticipating a fast, smooth settlement. Potential catalysts could be that investors are seeing positive stories in the news, the strong price momentum and the upcoming earnings report.”

FCA Probe

The FCA is investigating whether some of the world’s largest banks traded before their clients and rigged the WM/Reuters rate, used by pension funds and money managers to determine what they pay for foreign currencies. More than 25 traders have been fired, suspended or put on leave since the allegations emerged last year.

The regulator is negotiating with banks and it may levy any fines in the coming months, people with knowledge of the talks told Bloomberg News on July 24, with one person saying HSBC may be part of the group settlement. FCA Chief Executive Officer Martin Wheatley has said that the probe probably won’t be concluded before 2015.

HSBC will report that regulatory and litigation expenses fell to $183 million in the first half of 2014 from $517 million a year earlier, according to the average estimate of 15 analysts compiled by the lender. Pretax profit probably dropped 11 percent to $12.5 billion, while operating costs declined $400 million to about $18 billion, the projections show. HSBC will publish earnings on Aug. 4 at 9:15 a.m. London time.

Calls Jump

Calls betting on a 10 percent increase in HSBC shares cost 0.4 point more than puts protecting against a 10 percent decline, according to one-month data compiled by Bloomberg based on the Hong Kong stock. The price difference rose to 1.6 on July 29, the highest level since August 2011.

Archana Achuthan, a London-based spokeswoman for HSBC, declined to comment on options trading.

A gauge of banks listed on the Stoxx 600 Europe Index fell 7.4 percent from an almost three-year high in January as lenders from France’s BNP Paribas SA to Credit Suisse Group AG and Barclays were marred by probes. HSBC has dropped 6.6 percent since Jan. 15.

Ian Gordon, an analyst at Investec Ltd. in London, said a slowdown in Asian growth and a tough investment-banking environment may hurt HSBC. The lender said in May that profit dropped 20 percent in the first quarter as investment-banking revenue slipped.

Not Immune

The lender “is not immune from a slowdown in Asia and a more challenging investment-banking market in Europe,” Gordon said in an interview. He has a hold recommendation on the stock. “Impairments may have fallen, but with increasing dependence on global banking and markets” we urge caution, he said.

Rival Standard Chartered Plc, which gets more than three-quarters of its earnings in Asia, said in June that first-half operating profit probably dropped 20 percent from the same period last year. HSBC generated almost 40 percent of its revenue from Asia in 2013, data compiled by Bloomberg show.

Traders have been reducing the number of bearish HSBC bets relative to bullish contracts. The ratio of outstanding puts versus calls on the Hong Kong stock fell to 1.33-to-1 yesterday, the lowest in four months, from a one-year high of 2.13 in May, data compiled by Bloomberg show.

After this year’s drop in bank shares, investors may be getting more optimistic about a rebound in HSBC, according to Arun Melmane, an analyst at Canaccord Genuity Corp. in London, who recommends buying the stock.

“HSBC’s earnings report should be a clean number, more or less,” Melmane said in a phone interview. “Emerging markets have had benign growth, and they have so far managed to avoid any big regulatory fines.”

To contact the reporters on this story: Anna Hirtenstein in London at ahirtenstein@bloomberg.net; Stephen Morris in London at smorris39@bloomberg.net

To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net; Simone Meier at smeier@bloomberg.net Steve Bailey

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