HSBC Stocks Decline 6.1% as Earnings Reveal a Large Comparison Benefit

What happened

HSBC's U.S. depositary shares traded at $85.66, down 6.09%, on October 27. The bank reported pretax profit of $9.6 billion, up $2.3 billion, but $1.4 billion of that increase came from legal provisions that did not recur.

Confirmed

Global impact / market context

A large part of HSBC's profit increase came from not paying last year's legal costs, not from better operations. When that easier comparison fades, revenue growth and expense control must carry results, so investors may question how durable future profit gains are.

Analyst inference

HSBC trades at 12.27 times earnings and 1.69 times book value, which means investors pay about 12.27 times yearly profit and 1.69 times accounting net worth. Its GF Score of 68 shows stronger growth and profitability but weaker financial strength, a mixed picture.

Analyst inference

What to watch

1. Revenue rose $0.8 billion to $18.6 billion, and pretax profit excluding notable items rose $0.9 billion to $10.0 billion on a constant-currency basis, which means adjusted for exchange-rate moves. Confirmed
2. HSBC should keep revenue growing and expenses controlled as the $1.4 billion legal-provision benefit fades, since the headline profit increase depends heavily on that easier comparison. Proposed
3. Investors may focus on whether stronger growth and profitability readings can offset weaker financial strength and valuation signals, since those measures alone do not show whether the shares are cheap. Analyst inference

Evidence

• gurufocus.com