Brokers signal caution as HSBC shares scale new heights in Hong Kong

Stock surges to highest level this year as lender continues repurchases

PUBLISHED : Monday, 05 September, 2016, 8:58pm
UPDATED : Monday, 05 September, 2016, 10:44pm

Brokers remained wary on HSBC despite the bank’s stocks hitting their highest level since the first day of trading this year, thanks, in part, to the bank’s ongoing share repurchase programme.

HSBC shares closed at HK$59.95 a share on Monday in Hong Kong, the highest level since January 4 this year, and up 20 per cent since August 3 when the bank announced the buyback.

“The share-buyback has definitely helped HSBC’s share price recently,” said Ken Wong, Asia equity portfolio specialist at Eastspring Investments.

Wong added a number of cautionary notes, however. “HSBC is playing catch-up as it has significantly underperformed the Hang Seng Index despite the recent rally. Year to date, the stock has only returned 3 per cent on a total return basis while the HSI has returned 11.5 per cent,” he said.

Another problem, Wong said, “is the fact that HSBC trades at a much higher price to book multiple as compared to the Chinese or Japanese banks.”

“[HSBC’s] stock has had a great run but I would be cautious going forward,” said Brett McGonegal, chief executive of Capital Link International.

HSBC buyback sparks rise in share price, despite 29pc slump in interim profit

“The HSI has had the same luck, as it seems money has found its way into banks and property names lately. I can’t say I fully understand the driver here, as Hong Kong is not in good shape right now and is not in control of the economy with the dollar peg.”

The broader investment environment, with low fixed income yields may also have led to HSBC’s stock rise.

“Money that would normally be in debt markets is chasing beta in the equity market. These names that have been moving higher are attracting momentum traders and this will not end well,” said McGonegal.

HSBC shares rally to a six-month high after executing HK$105m share buyback in London

“I am sorry to say I think this phenomenon may well be encompassing HSBC.”

HSBC announced that it would buy back up to US$2.5 billion of its own shares following the completion of the sale of its Brazilian business. The first transaction took place on August 4, and after the most recent purchase on September 2, the bank now holds 47,044,834 of its own shares in treasury. The highest price paid by the bank over the month of repurchasing was £5.81, in the most recent transaction, and the lowest was £5.11 on the first day of the buyback.

A report from analysts at Morgan Stanley published after the announcement described the buyback as “a signal of confidence in the strength of the capital position of the bank”. However, it said that the move was tempered by a more cautious dividend policy.

Along with its interim results, in which it announced a fall in pre-tax profits of 29 per cent, HSBC said that it would maintain flat dividends for the foreseeable future, and that it would postpone its target of reaching 10 per cent return on equity by the end of 2017.

“We see [the buyback and dividend policy] as a cautious signal around the growth outlook, as current surplus capital cannot be profitably deployed, and future earnings growth needed to support the previous progressive dividend policy is hard to come by,” said the Morgan Stanley report.