HSBC Downgraded by JPMorgan as Bad Loans in Asia Set to Surge

  • Bank will underperform European peers, cut to underweight
  • HSBC non-performing loans in Asia seen reaching $5.4 billion

HSBC Holdings Plc will be one of the worst performers among European banks this year as waning growth in emerging markets more than doubles the bank’s bad loans in Asia, according to analysts at JPMorgan Chase & Co.

HSBC’s non-performing loans in the region, which accounts for about 39 percent of HSBC’s lending, may jump to $5.4 billion by year-end from $2.2 billion in June, analysts led by Raul Sinha wrote in a note on Wednesday, when downgrading the stock to underweight from neutral. In a tougher scenario, the lender’s bad debts in the region could surge to $15.3 billion, according to the note.

“With the rising probability of an emerging-market credit cycle likely to be priced into bank valuations, we expect HSBC to underperform relative to European banks,” Sinha said. “Given Asia is the largest component of HSBC’s emerging market exposure and that non-performing loans are rising, we believe that provisions are likely to pick up.”

Cooling emerging economies from China to India along with an equity-market rout has prompted investors to withdraw money from the region and flee Asia-focused stocks. HSBC Chief Executive Officer Stuart Gulliver, 56, said in November while the region’s market turmoil had not impacted credit quality so far, it delayed a planned redeployment of about $150 billion of assets to Asia.

Shares Drop

HSBC fell 3 percent to 507.1 pence at 12:26 p.m. in London, after losing 12 percent last year. That compares with JPMorgan’s target price of 500 pence, down from 580 pence.

Although HSBC has been able to avoid the fate of British rival Standard Chartered Plc, which plummeted 39 percent last year after loan impairments surged, JPMorgan sees Europe’s largest bank as a worse bet than Standard Chartered in 2016.

“We expect HSBC to underperform StanChart” Sinha wrote. “The market is pricing an emerging market non-performing loan cycle into StanChart’s valuation which trades at a 40 percent discount to HSBC, has improved capital and has already cut its dividend to preserve capital.”

Risky Assets

Standard Chartered, which also generates most of its earnings in Asia, raised about $5.1 billion in a rights offering last month to bolster capital as part of a plan to restore profitability. CEO Bill Winters is also cutting 15,000 jobs to help save $2.9 billion by 2018, scrapped a second-half dividend and plans to restructure or exit $100 billion of risky assets.

The lender is likely to benefit more than HSBC if the U.S. Federal Reserve continues to raise interest rates, according to JPMorgan estimates. A 100 basis point rate increase in the U.S. would help boost Standard Chartered’s return on tangible equity, a measure of profitability, by 1.6 percent, compared with 0.5 percent at HSBC, the analyst wrote.

HSBC has $273 billion of direct lending exposure to Greater China, with some of the riskiest debts in wider Asia including $74 billion lent to commercial real estate and $95 billion of mortgages, according to Sinha.

JPMorgan’s estimate of $5.4 billion of bad Asian loans in 2016 is based on a 1.4 percent non-performing loan ratio, compared with a 0.6 percent at the end of the second quarter. The $15.3 billion scenario models 4 percent of loans turning bad.

HSBC, which is scheduled to release full-year earnings next month, is currently assessing whether to move its headquarters away from London.

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