As Hong Kong's biggest banks prepare to report their 2019 results beginning next week, investors will be closely watching to see how HSBC Holdings and its peers expect the coronavirus outbreak to hit their bottom lines this year.
The early signs are worrisome as the health crisis hurts local businesses and consumers in an economy already wrecked by months of anti-government protests last year. Banking sector revenue is expected to be "very weak" in the first half as the viral outbreak cools loan growth and cuts into fee income, according to Morgan Stanley.
The city's biggest lenders, including currency-issuing banks Bank of China (Hong Kong), HSBC and Standard Chartered, have announced plans to allow mortgage holders and struggling small businesses to make interest-only payments on loans and several have said they would waive late fees on credit card payments by consumers facing financial difficulty.
"Various parts of economic activity have slowed down fairly sharply over the last few weeks, following a contraction in 2019," Morgan Stanley analysts Anil Agarwal and Irene Zhou said in a February 11 research report. "Unless the economy recovers quickly, we expect to see fairly elevated credit costs in 2020."
Investors is likely to dwell on this risk when banks present earnings, they said, especially whether the lenders build the current coronavirus-related slowdown into their cost assumptions.
HSBC will kick off reporting season for the city's biggest banks on February 18, including a strategy update from interim chief executive Noel Quinn. Standard Chartered reports on February 27 and Bank of China (Hong Kong) is expected to follow next month.
HSBC's strategic update could not have come at a more important stage for under Quinn, who is out to win the role on a permanent basis. His statement is expected to include job cuts in underperforming markets and a potential reinvestment of some of those cost savings in growth markets in Asia.
"On stocks, key will be HSBC earnings given the strategy update," Agarwal and Zhou said in the report. The focus will be on a likely risk-weighted assets run-down, capital release/buyback potential, and reassessment of its European and US business, they added.
Investors are likely to look beyond 2019, a trying year marked by the city's worst political crisis in decades that helped push the Asian financial hub into its first contraction since 2009. The city's biggest lenders are generally expected to report positive results in the fourth quarter, as the Hong Kong interbank offered rates (Hibor) held up to protect net interest margins.
HSBC is expected to report a 1 per cent rise in its 2019 earnings to 63.7 US cents per share, according to a consensus estimate of analysts surveyed by Bloomberg. Standard Chartered and Bank of China (Hong Kong)'s mainland parent also are expected to post annual gains, its other surveys show.
HSBC, other banks cut Hong Kong mortgage borrowers some slack as coronavirus outbreak sends small businesses into tailspin
The coronavirus outbreak, which originated in Wuhan, the capital of central Hubei province, has infected more than 60,000 people worldwide and led to at least 1,363 deaths, mostly in mainland China. The outbreak has caused retailers to shut stores, cut into foot traffic at malls and restaurants and forced businesses to keep employees at home, both in the mainland and in Hong Kong.
All of these could further strain the local economy, as Financial Secretary Paul Chan Mo-po warned on Sunday of widening job losses. The health crisis this time could be worse than the severe acute respiratory syndrome (Sars) epidemic in 2003, he added.
Fears over the viral outbreak are already threatening to hit some of the city's lenders.
DBS, Singapore's largest bank, cautioned on Thursday that it could cut the group's full-year revenue by 1 to 2 per cent if the outbreak is contained by this summer. Hong Kong contributed about 22 per cent of DBS's net profit last year.
The bank evacuated some staff from its headquarters in Singapore's financial district on Wednesday as a precautionary measure, after an employee was confirmed to have been infected with the disease known as Covid-19. Singapore has had at least 50 cases of infection.
One of HSBC's employees in Hong Kong had been placed in government quarantine after being in close contact with relatives who had been diagnosed with the virus, the bank said on Friday, after being notified by officials late Thursday.
The employee is being tested for the virus and had not come in contact with clients for the past two weeks, it added. The bank had cleaned and disinfected its offices in Central and Tseung Kwan O, while staffers who came in contact with the individual have been told to stay at home for 14 days as a precaution, HSBC said.
Weakness in retail, hospitality, airline and tourism sectors is likely lead to an increase in unemployment, which could strain banks' consumer lending asset quality, according to Sonny Hsu, an analyst at Moody's Investors Service.
While the coronavirus threat persists, Hong Kong banks still retain strong buffers that can help them cope with difficult operating conditions, as most are well-capitalised and asset quality of large companies in Hong Kong should 'hold up well", Hsu said.
"The situation will constrain economic activity in Hong Kong and exacerbate already-difficult operating conditions for Hong Kong banks," he added. "An extended disruption to economic activities would weaken the banks' asset quality and profitability. Bank loans to dining, retailing, hospitality and other consumer service sectors are most at risk."
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