HSBC Earnings: Good Cost Control; We Raise Fair Value of Hong Kong-Listed Shares Slightly

We raise the fair value estimate for HSBC’s HSBA Hong Kong-listed shares slightly to HK 80 from HK 78.5 while maintaining the London-listed shares at GBX 800 after the bank’s second-quarter earnings. We also adjust the Morningstar Moat Rating for HSBC to None from Narrow, and the Morningstar Uncertainty Rating to Medium from High, after a recent review of all the Hong Kong banks in our coverage. 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. Our fair value estimates imply about 21% upside from the current share prices in Hong Kong and London.

HSBC’s second-quarter results were better than expected, with management raising guidance for return on tangible equity, or RoTE, to a percentage in the mid-teens in 2023-24, compared with previous guidance of 12%+ in 2023. Management also announced a second USD 2 billion share buyback in the next three months, similar to the buyback that was just completed. Annualized credit costs of 38 basis points of loans, of which around a third were attributable to mainland China commercial real estate and a third to the UK ring-fenced bank, were in line with guidance.

The main drivers of the better-than-expected results were a 3-basis-point quarter-on-quarter widening in net interest margins, primarily driven by HSBC’s business in the U.K., and good cost control which brought the cost/income ratio for the quarter down to 47.1%. HSBC also successfully renegotiated the sale of its French retail business after regulators in Paris had required potential buyers to inject more capital, while its sale of the Canada business is on track to close in the first quarter of 2024. HSBC is making good progress simplifying its complex geographical footprint, but we think it will need to continue to do this, as well as continue to deliver strong results, to address some of the demands of its major shareholder, Ping An.