HSBC Earnings: No Big Surprises; Shares Are Undervalued

We maintain our HKD 80 fair value estimate for HSBC ‘s Hong Kong shares while raising our fair value for its London-listed shares to GBX 850 from GBX 800 to reflect appreciation of the U.S. and Hong Kong dollars against the pound since a quarter ago. Our fair values are equivalent to 1.15 times book value and represent about 40% upside from current prices. Assuming midcycle ROE of 12%, a fair price/book ratio of 1.15 times implies a fair price/earnings ratio of 9.6 times and a fair dividend yield of 5.2% assuming a 50% core payout ratio.