HSBC Holdings PLC (“HSBC”) announced a new 10NC5 Tier 2 SGD notes HSBC 5.300% 14Mar2033 Corp (SGD) at the initial price guidance (“IPG”) of 5.625%. The Tier 2 note is expected to mature in March 2033, while the first call and reset date falls in March 2028. If uncalled, the reset rate will be based on the prevailing 5-year SORA-OIS plus the initial margin.
HSBC is a British banking and financial services organisation, with operations found in 62 countries and approximately 39 million customers banking with them. It primarily operates through its three global businesses – Wealth and Personal Banking (“WPB”), Commercial Banking (“CMB”), and Global Banking and Markets (“GBM”). The WPB segment currently draws in the largest proportion of revenue at 44% in 2022, in comparison to CMB at 29% and GBM at 27%.
For the full year ended 31 December 2022 (“FY22”), HSBC reported an increase of adjusted revenue by 18% to USD 55.3b, which it attributed the results to the strong growth in net interest income, with increases in all of the global businesses. For FY22, HSBC saw an increase in its net interest margin by 28 basis points to 1.48%, reflecting the interest rate increase.
On the other hand, its reported profit before tax fell by USD 1.4b to USD 17.5b in FY22, which included the impairment charges arising from the planned sale of its retail banking operations in France. However, adjusted profit before tax and report profit after tax continued to see an increase of USD 3.4b and USD 2b respectively in FY22 over the previous year, inclusive of a USD 2.2b credit from a deferred tax asset.
Coming to HSBC’s credit profile, its CET1 ratio stands at 14.2% as of FY22, which had fallen by 1.6% over the previous year. HSBC highlighted that a decrease of 0.8% was due to new regulatory requirements, a decrease of 0.7% due to a fall in fair value through other comprehensive income and lastly, a fall of 0.3% due to impairment from the reclassification of the retail banking operations in France. HSBC intends to keep its CET1 ratio within the range of 14% to 14.5% in the medium term, with the intention of managing the range down further longer term. The liquidity coverage ratio and net stable funding ratio are at 132% and 136% respectively, both above the regulatory requirement of 100%.
The issuer is rated A3 (Stable)/ A- (Stable)/ A+ (Stable) by Moody’s/S&P/Fitch respectively, while the issue is expected to obtain a rating of Baa1/BBB/A- by Moody’s/S&P/Fitch respectively. Given the issuance is a Tier 2 note, we wish to highlight that the issue has a loss absorption feature in place.
HSBC’s other Tier 2 subordinated note HSBC 5.250% 27Jun2032 Corp (SGD) currently has a yield to maturity of 4.74% at the ask price 101.95. In comparison to the IPG of 5.625%, we think the new issuance is considerably more attractive. Against the recently issued ACAFP 4.850% 27Feb2033 Corp (SGD) at the IPG of 5.25%, HSBC’s new issuance IPG is priced considerably higher despite having somewhat similar credit ratings on both issuances (ACAFP 4.850% 27Feb2033 Corp (SGD) is rated BBB+/A- by S&P/Fitch). As such, we think the HSBC new issue would be a good consideration for investors seeking Tier 2 subordinated notes. Lastly, we would like to note that the final price guidance is likely to come lower than the IPG.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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