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HSBC Holdings Summary

Core Content

HSBC Holdings is a multinational universal bank with a strong presence in Asia (excluding Japan), the UK, the Middle East, and North America. The report provides a detailed analysis of its financial performance, valuation, and investment rationale, based on 1Q 16 results and forward-looking estimates.

Key Takeaways

• Earnings Performance:

  • HSBC's adjusted PBT for 1Q 16 was US$5.4bn, slightly above the forecast of US$4.6bn due to lower costs and higher trading income.
  • PBT was cut by 1% following the results, while EPS forecasts fell by 3–5% due to higher tax.
  • The loan book slightly decreased to US$920bn, with the outlook for modest recovery.
  • The CET1 ratio was flat at 11.9%, but with the Brazil sale imminent, it is expected to rise to 13.0% by year-end.

• Dividend and Payout Ratio:

  • The current dividend payout ratio is 89% on an underlying basis and over 100% on reported profits.
  • If earnings remain low, the dividend may need to be rebased.
  • The report suggests a potential dividend cut to 50–60% in the future, which would reduce the dividend to US$0.30–0.37 and result in a trailing yield of 4.8–5.8%.

• Valuation Analysis:

  • HSBC trades at 11x 2017E earnings, which is a typical bank multiple but 17% higher than the European bank sector.
  • The stock trades at 0.7x price-to-book value, below its historical average.
  • Using a Gordon growth model with a 2017 ROE of 7% and no growth, the price objective is set at 450p (GBP) and HK$51.21 (HKD).
  • A sum-of-parts analysis suggests an upside potential, though the near-term upside may not be realized due to the lack of asset sales.

Financial Highlights

Income Statement (Dec)

Balance Sheet (Dec)

Key Metrics

Investment Rationale

• HSBC's capital position is strong with a fully phased-in Basel 3 Common Equity Tier 1 above 12%.
• The bank is facing a downgrade cycle due to:
  • Lower for longer interest rates.
  • Increased capital requirements.
  • A decline in profitability and ROE.
• The group has stepped back from its previous guidance of a 50–60% payout ratio, but this is seen as appropriate given capital relief from disposals and expected rate hikes.

Valuation Model

Gordon Growth Model (2017E)

Sum-of-Parts (SoTP) Analysis (2017)

Investment Rating

• HSBC (HBCYF / LSE): Price Objective 450p, Underperform rating.
• HSBC (HBCXF / HKG): Price Objective HK$51.21, Underperform rating.
• HSBC (HSBC / NYS): Price Objective US$33.04, Underperform rating.

Risks and Outlook

• Upside Risks: Greater-than-expected US rate hikes and a stronger global economy.
• Downside Risks: Rate reductions, litigation and conduct costs, and a slowdown in China affecting Asia.

Analyst Information

• Alastair Ryan: Research Analyst, MLI (UK), +44 20 7996 4806, alastair.ryan@baml.com
• Michael Helsby: Research Analyst, MLI (UK), +44 20 7995 7659, michael.helsby@baml.com

Disclaimer

• This report is employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under FINRA rules.
• Refer to "Other Important Disclosures" for information on BofA Merrill Lynch entities responsible for the report in specific jurisdictions.
• The report includes potential conflicts of interest as BofA Merrill Lynch does business with issuers covered in its research reports.