Profits were under pressure, but the group remained profitable despite a 7x surge in loan loss provisions (compared to Q2 2019) to USD 3.8 billion for the quarter. The group expects to take provisions of USD 8-13 billion, so a large portion has already been booked in the first half of the year (USD 7 billion), and this compares to pre-provision profits of above USD 20 billion for the year – very manageable, in our view. The group actually improved its capital position, with its common equity tier one (CET1) ratio up 40 bps on the quarter to 15%, which represents a USD 35 billion buffer (excess capital) to requirements. Clearly there are headwinds for the group (US-China tensions, Brexit, Covid-19), but given the group’s strong excess capital position and ability to absorb potential loan loss provisions through earnings, we see the risk as very remote from a credit perspective, and in our view HSBC remains one of the strongest European banks.
Regarding HSBC’s bonds, the group’s AT1 CoCos remain attractive, in our view. For example the 6.375% USD AT1s callable in 2024 (coupon reset to the 5-year swap rate + 3.705% if not called) currently trades at 550 bps of spread, or 5.8% yield in USD. The bonds are rated Baa3 by Moody’s and BBB by Fitch, and therefore we are capturing high spreads for investment grade paper and see significant value.