Will Challenging Industry Backdrop Hurt HSBC Q4 Earnings?

HSBC Holdings plc (HSBC – Analyst Report) is slated to report fourth-quarter and 2015 results tomorrow, Monday, Feb 22, before the market opens.

Last quarter, this foreign bank reported an increase in earnings. Lower fines as well as settlement charges and steady progress in HSBC’s cost-saving initiatives acted as tailwinds. However, continued pressure on the top line and a rise in loan impairment charges were the undermining factors.

Will HSBC succumb to the revenue pressure this earnings season again? Or will the company’s restructuring and cost-control efforts manage to support the results? Let’s see what factors might have affected the earnings in the fourth quarter.

Factors Impacting Q4 Results

HSBC continues to focus on its core operations, while divesting or closing the less profitable ones. During the quarter, the company announced divestiture of its Bermuda operations. Further, the company is planning to restructure its Turkish operations after failing to find a suitable buyer for the same.

HSBC is trying hard to control expenses and improve efficiency. But operating expenses are bound to rise in the upcoming release, led by increased risk, compliance and related costs. Further, HSBC is embroiled in several litigation issues and regulatory probes pertaining to its past business malpractices. Hence, the company may record an additional legal provision during the quarter.

Moreover, slow economic recovery has forced the central banks of most countries to prioritize growth over inflation control. As a result, subdued interest income growth owing to low rate environment might hamper HSBC’s top line in this quarter as well.

Also, continued volatility in markets led to low level of client activity and trading revenues are bound to be adversely impacted by the same. Further, investment banking income will likely be under pressure during the quarter.

Additionally, loan impairment charges and other credit risk provisions are expected to trend upward as continued global slowdown may lead to deterioration in asset quality.