HSBC downgraded by JPMorgan as bad loans in Asia set to surge

[LONDON] 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 per cent of HSBC's lending, may jump to US$5.4 billion by year-end from US$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 US$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 US$150 billion of assets to Asia.

HSBC fell 3 per cent to 507.1 pence at 12:26 p.m. in London, after losing 12 per cent 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 per cent 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 per cent discount to HSBC, has improved capital and has already cut its dividend to preserve capital."

Standard Chartered, which also generates most of its earnings in Asia, raised about US$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 US$2.9 billion by 2018, scrapped a second-half dividend and plans to restructure or exit US$100 billion of risky assets.

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

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

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

BLOOMBERG