The game has certainly changed since Donald Trump won the US election, especially for banks.
According to US broker Jefferies, we are in uncharted territory. The broker’s immediate focus is on Janet Yellen’s future as chairperson of the US central bank, and the Federal Reserve’s policy on interest rates.
Recently released US economic data is increasingly supportive of a December rate hike, but the Fed could err on the side of caution if global markets and macro indicators deteriorate past a Brexit-like initial reaction, Jefferies reckons.
“Trump’s prior comments about Fed Chairperson Janet Yellen will introduce questions as well about her tenure. Over the longer-term, if Trump’s pro-growth policies boost inflation expectations and the yield curve steepens, additional rate hikes could follow and have positive impacts to bank fundamentals,” Jefferies said.
That’s a view echoed by UBS, which in a note ostensibly reviewing the third quarter earnings statement from banking behemoth HSBC Holdings PLC (LON:HSBA), said “watching HSBC just got a lot more interesting”.
“HSBC‘s 3Q16 earnings and capital were both better than we forecast, but the real drivers of the stock’s absolute and relative performance in the coming months will, we think, be changes to the market view on prospects for a parallel shift in the US$ rate curve in a Donald Trump-lead America and sterling’s performance against the US$,” UBS said, as it trimmed its price target for HSBC, derived from a sum-of-the-parts calculation, from 585p to 580p.
“Textbooks tell us these should act in the same direction – higher rates means higher EPS and stronger US$, both good for the HSBC share price. Into the first year of UK post-referendum negotiations, we believe many will seek safety and income in this stock,” UBS reckons, though it sticks with its neutral rating, as it believes the valuation already more than reflects its base case.
As for HSBC’s third quarter numbers, they were 6% better than consensus forecasts, mainly because of a better outcome in impairment charges in dollar terms, but these “didn’t really flow through to earnings revisions”, UBS noted.
Its own estimates have been left broadly unchanged, with sterling and euro weakness expected in the fourth quarter likely to provide head winds, which will offset the modest benefit from HSBC’s share buy-back programme.
Shares in HSBC were up 1.9% at 631.4p in mid-morning trading.
Story by ProactiveInvestors