Today I am looking at why a worrying read-across from another Asian banking giant makes for worrying reading for HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).
Asian clouds continue to cast concerns
Signs of financial slowdown in emerging markets across the globe are no big secret, stifling the share price of stocks such as HSBC Holdings, which rely heavily on these regions. So news today of another profit warning from from fellow Asian markets stalwart, Standard Chartered (LSE: STAN), mark a worrying omen for HSBC and its investors and underline the scale of deteriorating conditions in these places.
Standard Chartered chief executive Peter Sands warned of ‘a disappointing first half with difficult trading conditions,‘ with the company adding that the firm ‘continues to be impacted by the challenging external environment, alongside the rest of the industry.’
The bank advised that while revenues in China and Africa continue to grow well, strength in these countries remains outweighed by weakness in other key markets such as India, Korea and Singapore.
The business now expects total income for January–June to dip by a mid-single digit percentage on an annual basis, worsened by ongoing weakness in emerging market currencies — at constant exchange rates the bank anticipates a low-single digit percentage drop in group income. As a consequence total operating profit is forecast to tank 20% from the corresponding 2013 period.
This news should come as a huge worry to HSBC, which sources more than 55% of total profits from Asia.
Indeed, ‘The World’s Local Bank‘ announced just last month that pre-tax profit slumped by a fifth during January–March, down to $6.6bn, as revenues deteriorated 8% to $15.7bn, compared with the corresponding 2013 period.
Although the company’s performance has been choppy across the globe, weakness in Asia has been the major contributor to a souring bottom line in recent times — profit before tax nosedived 32% during January–March to $3.8bn.
I believe that, over the long term, a backcloth of exploding population growth in critical Asian markets, combined with a burgeoning middle class and low penetration rates across many of HSBC’s products, should underpin solid earnings growth. But in the meantime severe volatility in these regions could significantly hamper performance and, of course, shareholder returns.