Flint’s Exit Speaks to HSBC’s Deteriorating Outlook

(Bloomberg) -- HSBC Holdings Plc’s second-quarter results look solid but the unexpected departure of its chief executive would seem to indicate the bank is preparing itself to contend with a much weaker outlook, JPMorgan Chase & Co. says.

Keefe, Bruyette & Woods says the bank needs to find a replacement for outgoing CEO John Flint who will take a “more dynamic” approach to fixing underperforming parts of the business because the outlook indicates life is going to get tougher. Low rates and geopolitical risks, the latter demonstrated by developments inHong Kong and in U.S.-China relations, will make the operating environment tougher going forward, analysts say.

Analysts are divided on the bank’s new $1 billion buyback, seeing it either as a nice surprise or a token gesture. But one bright spot was the actual second-quarter numbers themselves, which were a broad beat against consensus.
The bank’s shares dropped 0.6% to 642.40 pence at 8:03 a.m. in London. In Hong Kong, the stock lost as much as 1.9% following the results, hitting the lowest level since October. Here’s a round-up of what analysts are saying about HSBC:

KBW, Ed Firth (market perform)

• Flint’s departure is the key news and Firth says he’s often been “uninspired” by the “business as usual” strategy under the outgoing CEO
• His replacement is more likely to be internal but will have to take a more “dynamic approach” to improving underperforming areas of the bank
• While second-quarter numbers are a “comfortable beat,” the outlook is “reasonably downbeat” and pressures are growing for the bank, notably in Hong Kong

JPMorgan, Raul Sinha (underweight)

• Overall the results look solid, with adjusted pretax profit about 8% ahead of company-compiled consensus, but the sheen is taken off this by the announcement Flint will leave after only 18 months in the role
• Sinha says Flint’s departure looks to have been driven by the HSBC board seeking to “accelerate change alongside a potentially rapid deterioration in outlook”

Jefferies, Joseph Dickerson (hold)

• The bank benefited from higher HIBOR rates in Hong Kong and tight cost controls but the $1 billion buyback announced looks “token,” given it is at only half the prior year’s level
• Outlook statement “points to the challenges the bank faces in terms of interest rates, not to mention the geopolitical risks”
• “Hard to see” consensus estimates for 2020 and beyond being revised higher after the results

RBC, Benjamin Toms (underperform)

• Profit was well ahead of expectations thanks to beat on revenue, costs and impairments, but the second-quarter results look “softer around the edges”
• The $1 billion buyback was below the $1.5 billion to $2 billion expected in consensus
• And “we find the timing a little odd” in terms of the departure of Flint

Bank of America Merrill Lynch, Alastair Ryan (neutral)

• Flint’s departure was unexpected but the results demonstrate it wasn’t due to near-term financials given that second-quarter revenue outpaced expectations
• New buyback is a “positive surprise” as BofAML had removed buybacks from its estimates

Bloomberg Intelligence

• Net interest margin increase and positive operating jaws demonstrate that HSBC is continuing to deliver, but with Flint’s exit and a downgraded outlook, those conditions are set to change
• Global Markets and Global Banking units both likely to need more refocusing and in order to meet its 2020 targets, would expect the bank’s costs and investment levels to be “aggressively managed.”

--With assistance from William Canny.

To contact the reporter on this story: Sam Unsted in London at sunsted@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino, Tom Lavell

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