USD Bank Bonds – Capturing Yield with High-Quality names

• Banks under our coverage posted divergent results in 1Q25 amid a complex global economic environment.
• While some banks like Barclays thrived on capital markets volatility, others such as HSBC, Standard Chartered and Macquarie Bank adopted a more defensive stance amid rising credit losses.
• Across the board, provisioning increased—signalling the sector’s readiness to absorb future shocks—yet underlying fundamentals and capital positions remain healthy, supported by CET1 capital ratios as well as liquidity coverage ratios comfortably above regulatory minimums.
• We continue to see compelling value across senior and subordinated bonds from these banking issuers for short to long tenors, within the 2 to 10 years to maturity range. Together, these bonds form a compelling toolkit across the interest rate curve, offering income stability, and higher-yielding exposures via perpetuals.

In the first quarter of 2025 (“1Q25”), banking issuers which we recently recommended posted divergent results amid a complex macro backdrop shaped by persistent inflationary pressures, rising geopolitical risks, and the early effects of global tariffs. While banks like Barclays thrived on capital markets volatility, others such as BNP Paribas, HSBC and Standard Chartered adopted a more defensive approach amid rising credit losses.

Broadly, banking income improved over the past 12 months while credit provisions edged higher, reflecting a more cautious stance. Nonetheless, stronger trading revenues provided resilience for some. That said, net profit continues to remain resilient across these major banks.

Despite macro uncertainties, we believe the credit profile for these banks remains healthy, supported by robust capital as well as strong liquidity and funding. These banks continue to report decent CET1 capital ratios, with a healthy average buffer of 286 bps over their respective regulatory requirement (Table 1). Liquidity coverage and funding remain healthy across the board, comfortably above regulatory minimums (Figure 1).

Figure 1: Liquidity and Funding Ratios as of last reported

Table 1: CET1 capital ratios across all remain healthy

Barclays

Barclays delivered a solid performance in 1Q25, with total income for the quarter rising 11% year-on-year (YoY) to GBP 7.7 billion, supported by a strong 21% YoY increase in fixed income trading (average among the top five Wall Street Banks: 6%). Also, net interest income (NII) rose to GBP 3.0 billion (+13% YoY), aided by higher-than-expected deposit balances and stabilised deposit mix (Tesco Bank of GBP 500 million NII vs GBP 400 million NII expected previously). As a result, profit before impairment charges rose 21% YoY to GBP 3.4 billion.

However, credit impairment charges increased to GBP 643 million, up 25% YoY, in light of US macroeconomic uncertainty to cover potential bad debts. Considering these, the bank’s net profit for the quarter came in at GBP 2.1 billion, reflecting a 16% YoY growth. Its return on tangible equity (RoTE) reached 14.0% (1Q24: 12.3%), exceeding internal targets of ~11% for this year and surpassing its 2026 target of over 12%.

Despite the rise in credit impairment charges, Barclays maintained a healthy capital position with an improved Common Equity Tier 1 (CET1) capital ratio at 13.9% (1Q24: 13.5%), positioning it at the upper end of its target range (13.0%-14.0%). The bank also possesses strong liquidity, with a liquidity coverage ratio of 175% (1Q24: 163%) helped by robust earnings growth. Further, net stable funding ratio (NSFR) remained stable at 136% (1Q24: 136%). Both ratios are well above the regulatory minimum of 100%.

BNP Paribas

In 1Q25, BNP Paribas’ net banking income rose 3.8% YoY to EUR 13.0 billion (1Q24: EUR 12.5 billion). In terms of operational performance, the bank managed to deliver higher gross operating income of EUR 4.7 billion (+3.5% YoY) compared to 1Q24’s EUR 4.5 billion. However, the bank’s provisions for stage 3 exposures or non-performing loans rose by EUR 12 million to EUR 775 million in 1Q25. As a result, operating income only grew slightly YoY to EUR 3.9 billion (+0.5% YoY).

Net income fell -4.9% YoY to EUR 3.0 billion (1Q24: EUR 3.1 billion), largely due to the absence of significant non-recurring gains recorded in 1Q24, rather than any weakness in underlying business operations. In 1Q24, BNP Paribas benefited from two exceptional items, (i) a EUR 226 million gain from the reconsolidation of its Ukrainian operations and (ii) a EUR 118 million capital gain from the sale of 80% of its Mexican personal finance business. Adjusting for these one-off gains, the underlying earnings momentum in 1Q25 remained solid and net profit would be up 7% YoY.

The bank maintains a healthy capital position, supported by its CET1 capital ratio of 12.4% (Basel IV basis: 12.3%). Though the ratio is down slightly from 12.9% at end-2024 (1Q24: 13.1%), it maintains a capital buffer of ~200 bps above regulatory minimum. BNP Paribas reported a liquidity coverage ratio of 133%, above the minimum requirement of 100%. While this was amongst the lower end of the European banks we cover, we think the bank’s liquidity position remains healthy, improving after mid-2019 and achieving above 130% LCR consistently in recent years. Overall, the bank’s consistent operational performance would provide a cushion against seasonal or regulatory capital fluctuations.

Standard Chartered

In 1Q25, Standard Chartered recorded a 1.0% YoY increase in NII to USD 1.6 billion and 7% YoY increase in non-NII to USD 3.8 billion, making up total income of USD 5.4 billion (+5% YoY). In terms of financial performance, operating profit before impairment and taxation rose 9% YoY to USD 2.3 billion. Hong Kong remains the largest market for the bank, making up 25.3% (1Q24: 21.4%) of operating income.

However, credit impairment charges rose by 32% YoY to USD 217 million (1Q24: USD 165 million), in response to macroeconomic and geopolitical uncertainties. This includes a USD 73 million management overlay for China commercial real estate (CRE) exposures and a USD 47 million overlay for clients with exposure to the Hong Kong CRE sector. Despite higher credit impairment charges, net profit grew 14% YoY to USD 1.6 billion. As a result, RoTE grew further (14.8% in 1Q25 vs 13.5% in 1Q24) alongside earnings per share (USD 56.6 in 1Q25 vs USD 46.5 in 1Q24).

The bank continues to maintain strong capital and liquidity positions, supported by a broad and stable deposit base. Despite the full impact of the USD 1.5 billion share buyback announced in February 2025, the bank’s CET1 capital ratio remains solid at 13.8% (+25 bps YoY) driven by earnings accretion and capital management initiatives. Both liquidity coverage ratio and leverage ratio improved slightly YoY to 147% (1Q24: 146%) and 4.7% (1Q24: 4.8%) respectively, underscoring prudent asset and liability management. Overall, the bank managed to deliver a strong financial performance in 1Q25 amid an evolving economic environment, which will supplement its healthy credit profile.

HSBC

HSBC’s NII fell 4% YoY to USD 8.3 billion in 1Q25 while its net fee income rose 6% YoY to USD 3.3 billion and net income from its insurance business remained stable at USD 5.4 billion. However, business disposals in Canada and Argentina resulted in one-time gains amounting to USD 3.7 billion in 1Q24 . As a result, net operating income before change in expected credit losses (ECL) and other credit impairment charges fell to USD 17.6 billion from USD 20.8 billion a year ago.

While the bank announced a USD 3 billion share buyback programme—signalling confidence in its capital position—investors were concerned by the credit deterioration, especially within its commercial real estate exposure in Hong Kong. The bank reported higher ECL and other credit impairment charges of USD 0.9 billion, which is USD 0.2 billion higher than in 1Q24, as the bank increased allowances to reflect greater geopolitical tensions and higher trade tariffs. This figure also included charges of USD 0.1 billion against exposures in the onshore Hong Kong commercial real estate sector. Overall, net profit came in lower at USD 7.6 billion compared to USD 10.8 billion in 1Q24, largely due to the non-recurring one-time gains from disposal of the Canada and Argentina. Excluding the one-time gains, earnings growth in 1Q25 remained stable.

HSBC’s capital position remains healthy, supported by its CET1 capital ratio of 14.7% (1Q24: 15.2%). The slight drop in CET1 ratio was due to an increase in risk-weighted assets of USD 15 billion (foreign currency translation differences, asset quality and asset size movements), partially offset by an increase in CET1 capital of USD 0.6 billion. Despite the planned share buyback, which is expected to reduce the CET1 capital ratio by ~0.4 percentage points in 2Q25, the bank continues to target a CET1 range of 14.0% to 14.5%. In terms of liquidity, its liquidity coverage ratio improved slightly to 139% in 1Q25 compared to 136% a year ago, well above the regulatory minimum of 100%.

Macquarie Bank

Macquarie Bank reported its full-year results for the financial year ended 31 March 2025 (denoted as FY25). For FY25, NII rose to AUD 3.2 billion (FY24: AUD 3.1 billion), net trading income fell slightly to AUD 5 billion (FY24: AUD 5.3 billion), and fee and commission income remained flat at AUD 2.6 billion.

Notably, net credit impairment charges/reversals rose from a reversal of AUD 49 million to a charge of AUD 150 million, stemming from weaker recovery expectations on residual car loans and a deteriorating macroeconomic outlook. Despite the various downward pressures, pre-tax profit grew 9% YoY to AUD 4.4 billion in FY25 from FY24’s AUD 4.1 billion while net profit grew 18% YoY to AUD 3.4 billion from AUD 2.9 billion.

Capital metrics remain healthy, with a CET1 ratio of 12.8% (FY24 (as of 31 March 2024): 13.6%) under the Australian Prudential Regulation Authority Basel III framework, or 17.6% (FY24 (as of 31 March 2024): 18.7%) on a harmonised basis, indicating a robust capital position. Both are sufficiently above regulatory requirements of 10.5% including capital buffers. Liquidity coverage and net stable funding ratios stood at 175% and 113%, respectively, highlighting a solid balance sheet. Leverage ratio improved slightly from 5.2% (harmonised Basel III: 5.9%) to 5.1% (harmonised Basel III: 5.8%).

Recommendations

In the face of persistent macro volatility and trade headwinds, the resilience of major global banks such as HSBC, Standard Chartered, Barclays, Macquarie and BNP Paribas remains selling point for credit investors. With decent CET1 ratios, healthy asset quality, high liquidity and funding, as well as prudent risk management, these issuers continue to display a healthy credit profile.

We continue to see compelling value across senior and subordinated bonds from these banking issuers for short to long tenors, within the 2 to 10 years to maturity range (Table 2). Together, these bonds form a compelling toolkit across the interest rate curve, offering income stability, and higher-yielding exposures via perpetuals (Table 3).

We recommend the following senior bank bonds which offer compelling yield and short to mid-duration income:

• BACR 7.385% 02Nov2028 Corp (USD)
• HSBC 7.390% 03Nov2028 Corp (USD)
• HSBC 5.130% 03Mar2031 Corp (USD)
• STANLN 5.545% 21Jan2029 Corp (USD)
• STANLN 6.301% 09Jan2029 Corp (USD)

Investors seeking higher yield and are willing to take on modestly higher risk can benefit from the subordinated Tier 2 debt from these banks. We take into consideration the yield and years to call for Tier 2 subordinated bonds as, under Basel III regulations, Tier 2 bank bonds that are not called back past their call date have to be amortised. This incentivizes issuers to redeem and refresh Tier 2 capital earlier.

That said, investors have to be aware of the embedded loss absorption features on Tier 2 subordinated bonds. We recommend the following subordinated bonds:

• HSBC 6.547% 20Jun2034 Corp (USD)*
• HSBC 7.399% 13Nov2034 Corp (USD)*
• HSBC 5.874% 18Nov2035 Corp (USD)*
• STANLN 4.300% 19Feb2027 Corp (USD)*
• DB 5.882% 08Jul2031 Corp (USD)*
• MQGAU 3.624% 03Jun2030 Corp (USD)*
• MQGAU 6.798% 18Jan2033 Corp (USD)*

For investors with higher risk appetite and a tolerance for potentially a much longer investment horizon, the following perpetual bonds stand out for its yield to call. However, investors should exercise caution when investing in these bonds due to their highest priority for loss absorption (among banking bonds) and the potential for coupon deferrals during periods of financial losses.

• HSBC 6.500% Perpetual Corp (USD)
• BACR 9.625% Perpetual Corp (USD)
• BNP 5.125% Perpetual Corp (USD)

Table 2: Recommended USD i) senior non-preferred bonds and ii) subordinated bonds*

Table 3: Recommended USD perpetual bonds

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in STANLN 4.300% 19Feb2027 Corp (USD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

Our podcast series, Yield Hunters, is available on Spotify, iTunes Podcasts and Google Podcasts. We share our thoughts on new bond issues and hold discussions on the fixed income space. Listen to our latest episode below and follow us!