HSBC Earnings: Cost Concerns and Unexpected Impairment Disappoint Market; We Remain Buyers

HSBC's December-quarter operating performance was largely in line with our expectation but an unexpected impairment of $3 billion led to full-year 2023 net profit of $22.4 billion falling 10.8% short of our estimate. However, the market is reacting negatively given an operating miss to consensus estimates. We also note some disappointment over guidance that costs will rise by 5% in 2024. This is counter to most banks indicating that they are striving to keep costs down. HSBC indicates a lagging inflation impact is hitting them. Nonetheless, we don't see significant changes to our profit forecast for HSBC, as higher fee and noninterest income and stable net interest margin, or NIM, compensate for the rise in costs. With minimal change to our profit forecast, our fair value estimate is unchanged at GBX 850, $51 per ADR, and HKD 80. HSBC remains inexpensive at around 1.13 times 2024 price/book and ROE averaging around 12% through 2028.