HSBC Earnings: No Big Surprises; Shares Are Undervalued

We maintain our HKD 80 fair value estimate for HSBC ‘s HSBA 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.

HSBC’s third-quarter earnings were in line with our expectations. The bank revised its cost guidance for this year up slightly for technology spending and performance-based pay in part reflecting greater inflation in some geographies than it had anticipated at the beginning of the year, but expense control overall remains good and we forecast a full-year cost/income ratio of around 48%, HSBC’s lowest since the global financial crisis. Annualized credit costs in the third quarter were 42 basis points of gross loans, in line with HSBC’s full-year guidance of around 40 basis points. Of the 42 basis points, we estimate that about 20 basis points were for mainland China commercial real estate exposure, up from about 13 basis points for such exposures in the prior quarter. Quarterly net interest margin, or NIM, was 1.70%, up 19 basis points year on year and down 2 basis points from the prior quarter. Our outlook is for a similar small decline in the fourth quarter and for full-year 2024 NIMs to be down about 4 basis points from full-year 2023, assuming that the U.S. Federal Reserve is close to done with its current cycle of rate hikes, but subsequent rate cutting will not happen rapidly.

HSBC announced a buyback of up to USD 3 billion to be completed by late February, a slight increase in scale from the USD 2 billion buybacks in the prior two quarters. This is positive but is line with our expectations given the generally good results.