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

We raise the fair value estimate for HSBC's 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.