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Q2 Banks – P5 – HSBA Q1 reaction
HSBC (HSBA)
Expectations for HSBC’s Q1 results have been high, but the report itself disappointed investors, in part because of a rise in operating expenses which left the bank significantly short of its own 10% Return on Equity target (RoE stood at 7.5% in Q1 2018, a fall of 6.3% compared to a year before).
January-March net profits were down 1.3% to $3.09B (vs. $3.13B a year before), while operating expenses (+13% YoY) grew faster than revenues (+5.5% YoY). A significant part of growing expenses ($897M) was earmarked to resolve legal and regulatory disputes related to mis-selling of mortgage-backed securities. To sweeten the pill, HSBC also announced a $2B share buy-back programme.
Share price reaction on the day Q1 results were announced (4 May) was mild. Initially, HSBC’s share price fell to the low of 697p within 2 hours of market’s opening bell but has recovered some losses in the afternoon, ending the session -0.96%. The next week, however, HSBC’s shares rallied and continued moving higher for the next 7 days, helped, in part, by the attraction of the announced share buy-back.
Trading with CFDs, Long or Short
Buying HSBC £10,000 shares at 698p using a £2,000 margin, they could have waited for the share price to come back to the 2 May resistance level of 733p. This ~5% share price rise over 7-day period would allow them to gain circa £500, or 25% of their initial deposit. Keep in mind that if shares continued falling on the day of the earnings release, the above transaction would have resulted in a loss.Investors who anticipated this reaction to HSBC’s quarterly results could have used the initial negative reaction to the earnings announcement to buy HSBC shares using CFDs when the share price hit session’s low in the morning.
Another alternative would have been to sell HSBC shares the day before earnings announcements, opening a Short position at 728p. The resulting fall to 698p would have represented a potential profit of around £413 excluding commission and overnight financing costs. Using CFDs opens multiple trading options for investors, while decreasing exposure.
Source: CMC Markets, 19 July 2018
Source: CMC Markets, 19 July 2018
Example of a notional HSBC deal ticket.
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Prepared by Michael van Dulken, Head of Research
