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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see <a href="https://www.smartkarma.com/insights/hsbc-capital-forbearance-and-covid-19-sensitivity" target="_blank" data-smartkarma-citation="insights:47598" rel="noopener">HSBC: Capital, Forbearance and Covid-19 Sensitivity</a> for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, <a href="https://www.smartkarma.com/entities/ubs-group-ag" target="_blank" data-smartkarma-citation="entities:22590:1" rel="noopener">UBS Group's (UBSG VX)</a> recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC Holdings' (HSBA LN) recently issued 4.6% coupon 2030 first call note is beginning to look overbought relative to other banks and relative to its own credit curve. At the same time, returns are likely to be negatively impacted by rising interest rates as the year progresses. As such, we screen for value in HSBC’s Additional Tier 1 (AT1) curve for alternate investment options to achieve greater total returns this year.This is the second insight in a series on HSBC. In the first note, we considered the bank's ability to withstand a material increase in its credit costs and identified potential Covid-19 asset quality sensitivity. Please see HSBC: Capital, Forbearance and Covid-19 Sensitivity for more details.In this insight, we determine where the market may be mispricing the bank's credit risk and screen for potential extension risk while considering the liquidity of HSBC's AT1 instruments denominated in US$, Singapore-dollars and Euros.The longer the duration of the bond, the greater the price impact from a parallel shift in the yield curve. In theory, credit spreads should remain unchanged, to strengthen, as the economy recovers, and rates rise. In practice, this depends on the spread level per unit of duration along the credit curve. This accounts for the forward-looking nature of the market with respect to perceived credit risk. With an effective duration of 7.85 years and a relatively low credit risk premium, the 2030 callable AT1 note could suffer a lower total return than all other HSBC AT1s, as the yield curve steepens.Concurrently, given HSBC's Common Equity Tier 1 (CET1) capital buffer of approximately 370 basis points, the 10-year note trades tight relative to banks with higher CET1 buffers. In fact, UBS Group's (UBSG VX) recently issued 4 3/8% coupon 2031 callable bond currently looks better value relative to each bank’s respective capital buffers.Taken together, we find better value elsewhere along HSBC’s AT1 curve.

HSBC: AT1 Positioning for Greater Total Returns