Company Reports

We see HSBC's strong positions in the banking systems of Hong Kong and the UK—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

We lift our fair value estimate for HSBC to GBP 872 per share (HKD 84.80, $54.50 per ADR) from GBP 850 (HKD 80.00, $51.00) following first-quarter 2024 results that reflected solid noninterest income growth. Its net interest margin of 1.63% is also tracking our expectation comfortably, particularly with interest rates looking to stay high into second-half 2024. HSBC’s share price is reacting positively to the results as well as the announced ordinary dividend of $0.10 per share, a special dividend of $0.21 per share, and a share buyback of $3 billion for the second quarter. We remain buyers of HSBC.

HSBC's December-quarter operating performance was largely in line with our expectation but an unexpected impairment of $3 billion led to full-year 2023 net profit of $22.4 billion falling 10.8% short of our estimate. However, the market is reacting negatively given an operating miss to consensus estimates. We also note some disappointment over guidance that costs will rise by 5% in 2024. This is counter to most banks indicating that they are striving to keep costs down. HSBC indicates a lagging inflation impact is hitting them. Nonetheless, we don't see significant changes to our profit forecast for HSBC, as higher fee and noninterest income and stable net interest margin, or NIM, compensate for the rise in costs. With minimal change to our profit forecast, our fair value estimate is unchanged at GBX 850, $51 per ADR, and HKD 80. HSBC remains inexpensive at around 1.13 times 2024 price/book and ROE averaging around 12% through 2028.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K.—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

We have updated our models for Hong Kong banks in our coverage. Our fair value estimates for HSBC and Standard Chartered are unchanged, but we've cut our fair value for BOC Hong Kong by 7% to HKD 33 and for Hang Seng Bank by 19% to HKD 110. Despite these adjustments, we maintain the view that all banks are undervalued at current prices, with BOCHK showing the greatest potential upside.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K.—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

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.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K.—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K.—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

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.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K., and its ability to link these two to support global business, as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

We maintain our narrow moat rating on HSBC and keep our fair value estimate of GBX 800 for its London listing while our fair value estimate for its Hong Kong listing rises 2% to HKD 78.5 from HKD 77 and for its U.S. ADRs to USD 50 from USD 49. Our fair values represent a multiple to March 2023 book value of 1.09 times and imply 31%-33% upside. Assuming midcycle ROE of 12%, a fair price/book ratio of 1.09 times implies a fair price/earnings ratio of 9.1 times and a fair dividend yield of 5.5% assuming a 50% core payout ratio.

Shares of Asian banks in our coverage declined again Thursday morning after Credit Suisse’s 24% drop overnight to below CHF 1.70 per share reignited concerns about global financial stability that emerged last week with the failure of Silicon Valley Bank. In terms of systemic risk, we see very low risk of bank runs occurring anywhere in Asia given policy support from each government and the absence of problematic large institutions like Credit Suisse which could become vectors of contagion. Japanese banks are the most susceptible in Asia, in our view, to worries over financial stability in the United States or Europe due to their greater linkages with these regions. Next in terms of vulnerability, in our view, is the Korean banking system, which depends on having access to U.S. dollar liquidity. However, we think the U.S. Federal Reserve, or the Fed, can be relied upon to set up a currency swap arrangement with the Bank of Korea again if needed to ensure stability. The Fed has a continuous unlimited swap agreement with the Bank of Japan.

We maintain our narrow moat rating for HSBC Holdings, our fair value estimate of $49 for its U.S. ADRs, and our fair value estimate of GBX 800 for its London listing, while the fair value estimate for its Hong Kong listing rises slightly from HKD 75 to HKD 77 due to rounding and minor currency fluctuation upon change of coverage analyst. Our fair value estimates are equivalent to 1.17 times book value as of the end of 2022 and represent 25%-27% upside to the current prices. Our narrow moat rating for the group reflects our view that HSBC enjoys a wide economic moat in Hong Kong, where it is the dominant local bank, that it has a narrow-moat position in the U.K., and no economic moat in most other geographies such as the U.S. Its moat sources are in cost advantage from sticky deposits in its key markets and customer switching costs both in its key markets and in some parts of its global banking operations.

We see HSBC's strong positions in the banking systems of Hong Kong and the U.K., and its ability to link these two to support global business, as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view.

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.