HSBC PLC’s exposure to Asia matters more in perception than reality,

Holdings () had its ‘sell’ sign removed by Berenberg on Thursday, as risks from coronavirus loan losses are believed to be “material, but manageable” and the shares are likely benefit from investor perceptions about its exposure to Asia’s faster recovery from coronavirus.

The banking giant recently said it expects net interest income to fall by more than US$3bn during 2020, around 10%, and for margin pressure to persist beyond 2020. 

Q1 results: HSBC profits plunge due to preparations for huge coronavirus loan losses

For the full-year the FTSE 1000-listed lender will be hit with around US$9.2bn of loan losses, Berenberg’s analysts estimate, leading to earnings per share falling 12% to $0.251. 

While a faster-than-expected economic recovery could enable stronger revenues, the analysts said they believe the risks to their revenue forecasts are “skewed to the downside due to likely revenue attrition and disruption to growth caused by HSBC’s restructuring”.

At the bank’s first-quarter results, chief executive Noel Quinn said he planned to keep up strategic investment but reduce operating costs “to partly mitigate the reduction in revenue”, while also halting some of the bank’s ongoing transformation programme, including pausing the vast majority of planned redundancies.

The Berenberg analysts reckon the actions to reduce costs may exacerbate near-term headwinds to revenue and profit margins may be exacerbated by the upfront cost of further.

“For instance, HSBC’s current strategy includes a US$1bn planned fall in operating costs, but involves US$6bn of restructuring costs. The cost of further savings may therefore be material.”

The recommendation was upgraded to ‘hold’, while the share price target was cut to 390p from 430p.

“While HSBC remains far from cheap, its 35% discount to [tangible book value] is comparable to historical troughs,” the analysts said in a note to clients, which they said better reflects expected returns for the coming few years.

HSBC’s footprint in faster-growing markets, such as Asia, distinguishes it from many peers, the analysts added, with the perception perhaps more important than the effects.

“Given this, and perceptions that these markets may recover from COVID-19 sooner than developed markets, we are mindful of the potential for HSBC to outperform peers in the short term. 

“We believe HSBC may struggle to benefit from these trends, but that such perceptions may limit downside.”