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HSBC’s Long Restructuring Finally Bearing Fruit

Our fair value estimate for HK-listed shares has increased.

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HSBC Holdings PLC

We maintain our narrow moat rating for HSBC Holdings HSBA, 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 to HKD 77 from HKD 75 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.

Fourth-quarter earnings were better than expected, with bottom-line annualized ROE of 10.1%, several percentage points above Morningstar and market expectations. Most of the upside, however, was due to abnormally low effective tax rate due to one-time factors, and the beat above the pretax line was modest. That said, we are encouraged that HSBC seems to be increasingly gaining traction in a turnaround after it doubled down on restructuring at the end of 2019, reaching deals to pare its presence in secondary markets such as France and Canada while focusing more investment on Asia and the Middle East where its competitive position is stronger. We forecast that it will generate ROE in excess of 10% throughout our forecast horizon, above our assumed cost of equity of 9.5%, as the increased focus on relatively more profitable areas finally starts to pay off. HSBC also plans to resume quarterly dividend payments this year after having been forced to make dividends temporarily more sporadic in 2020 amid the pandemic.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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