HSBC Holdings plc ADR (HSBC-NYSE)

Transcription

1 February 24, 2015 HSBC Holdings plc ADR (HSBC-NYSE) Analyst Note NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 12/21/2014 Current Price (02/23/15) $44.68 Target Price $47.00 SUMMARY HSBC s 2014 results were disappointing. Results were adversely impacted by less number of business disposal and reclassification gains. Also, significant items including fines, settlements, UK customer redress and associated provisions drove the earnings down. However, lower loan impairment charges and stable revenues acted as tailwinds. Also, capital and profitability ratios remained strong. But a persistent rise in operating expenses was the major dampener. After analyzing the company s results, we are maintaining our longterm Neutral recommendation on the stock. SUMMARY DATA 52-Week High $ Week Low $44.68 One-Year Return (%) Beta 1.10 Average Daily Volume (sh) 1,800,908 Shares Outstanding (mil) 3,838 Market Capitalization ($mil) $171,482 Short Interest Ratio (days) 1.45 Institutional Ownership (%) 3 Insider Ownership (%) Annual Cash Dividend $2.45 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -3.2 Earnings Per Share (%) Dividend (%) 9.7 using TTM EPS 13.0 using 2015 Estimate 8.9 using 2016 Estimate 9.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Value Industry Banks-Foreign Zacks Industry Rank * 220 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,854 A ,002 A ,778 E ,856 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $4.20 A 2014 $3.45 A 2015 $5.00 E 2016 $4.67 E Projected EPS Growth - Next 5 Years % 6 1 ADR = 5 Shares; Quarterly earnings and revenue figures are 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS HSBC '14 Earnings Hurt by Rising Legal Expenses, Down Y/Y Feb 23, 2015 HSBC s earnings for 2014 came in at $0.69 per share, down 18% from the prior-year figure. Further, net profit declined 17% year-over-year to $14.7 billion. Results were largely impacted by less number of business disposal and reclassification gains. Further, significant items including fines, settlements, UK customer redress and associated provisions adversely impacted HSBC s financials. Nevertheless, lower loan impairment charges and stable revenues acted as tailwinds. Also, capital and profitability ratios remained strong. But a persistent rise in operating expenses was the major dampener. Performance in Detail (On Adjusted basis) Profit before tax was $22.8 billion, inching down 1% from the prior-year level. The fall was mainly due to a rise in operating expenses, partly offset by lower loan impairment charges and increase in revenues. Total revenue was $62 billion, almost stable compared with the year-ago figure. The rise was driven by growth in the Commercial Banking segment. Loan impairment charges and other credit risk provisions were $3.9 billion, down 31% year over year. The fall reflected the present economic environment and the changes HSBC made in its loan portfolio since Total operating expenses rose 6% year over year to $37.9 billion. The rise was due to increased risk, compliance and related costs, inflationary pressures and investment in strategic initiatives to support growth. Efficiency ratio increased to 61.1% from 57.7% in the prior year. A rise in efficiency ratio indicates fall in profitability. Profitability and Capital Ratios HSBC s profitability ratios deteriorated, while capital ratios remained strong. Annualized return on equity was 7.3%, down from 9.2% as of Dec 31, Pre-tax return on risk-weighted assets (annualized) declined to 1.5% from 2.0% in the prior-year period. Nonetheless, HSBC lowered its target for ROE to more than 10%. The company had earlier set a target to exceed 12%. The company s common equity Tier 1 ratio as of Dec 31, 2014 was 11.1%, up from 10.9% as of Dec 31, Equity Research HSBC Page 2

3 VALUATION HSBC ADRs currently trade at 8.9x the Zacks Consensus Estimate for 2015, a discount of 23% from the industry average of 11.6x. On a price-to-book basis, ADRs are trading at 0.9x, 25% below the 1.2x for the industry average. Hence, the valuation, on both a price-to-earnings basis and a price-to-book basis, looks attractive. Our 6-month target price of $47.00 per ADR equates to about 9.4x the Zacks Consensus Estimate for This target price implies an expected total return of 5.2% over that period, which is consistent with our long-term Neutral recommendation on the ADRs. Also, HSBC currently carries a Zacks Rank #3 (Hold). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low HSBC Holdings plc (HSBC) Industry Average S&P Bank of China Limited (BACHY) Agricultural Bank of China Limited (ACGBY) Lloyds Banking Group plc (LYG) Banco do Brasil S.A. (BDORY) TTM is trailing 12 months; F1 is 2015 and F2 is, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA HSBC Holdings plc (HSBC) Industry Average S&P Equity Research HSBC Page 3

4 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. OVERVIEW Headquartered in London, HSBC Holdings plc is a major global banking and financial services firm, with over $2.73 trillion in assets as of Sep 30, Operating through an international network of as many as 6,200 offices in over 74 countries and regions in Europe, Asia, the Middle East and North Africa (MENA), North and Latin America, HSBC provides a wide range of financial services to about 54 million customers. The company s primary banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. The former is the largest bank in Hong Kong and is HSBC s flagship bank in the Asia-Pacific region. The HSBC roots can be traced back to 1865, when it initiated operations with the Hong Kong and Shanghai Bank. Through a series of acquisitions, HSBC has transformed from a Hong Kong-based operation to a premier business brand in Europe and North America. Among HSBC s acquisitions is the 88.89% purchase of PT Bank Ekonomi Raharja Tbk in Indonesia, in May In 2008, it acquired the assets, liabilities and operations of The Chinese Bank in Taiwan. In 2006, the company acquired 99.98% of the outstanding shares of Grupo Banistmo S.A., the leading banking group in Central America. In 2005, HSBC Finance completed the acquisition of Metris Companies Inc. HSBC manages its operations through the following groups: Equity Research HSBC Page 4

5 Retail Banking and Wealth Management (RBWM): This group offers banking and wealth management services to customers based on their individual needs. For affluent customers who value international connectivity, it provides Premier and Advance services. Additionally, the company s card services come under this segment. HSBC is one of the largest card issuers in the world, offering branded and co-branded cards. This group also includes customer offerings including personal banking products and wealth management services. Commercial Banking (CMB): Corporate and Business Banking are two segments under this group. While the Corporate segment serves both Corporate and mid-market companies with more sophisticated financial needs, Business Banking caters to the small and medium-sized enterprises (SME s) sector. Global Banking and Markets (GB&M): GB&M is managed under two principal business lines: Global Markets and Global Banking. The group provides customized financial solutions to major government, corporate and institutional clients and private investors worldwide. Under this group, sector-focused client service teams, comprising relationship managers and product specialists, develop financial solutions to meet individual client needs. Global Private Banking (GPB): HSBC Private Bank is the principal marketing name of the company s international private banking business. GPB offers its clients both traditional and innovative ways to manage and preserve wealth, while optimizing returns. Other includes the results of property transactions, unallocated investment activities, centrally held investment companies, movements in fair value of the company s debt, central support and functional costs with associated recoveries. Full Year 2013 Net Operating Income (By Customer Group) Global Private Banking 3% Other 8% Global Banking and Markets 27% Commercial Banking 23% Retail Banking and Wealth Management 39% HSBC s shares are listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges and held by over 216,000 shareholders across 131 countries and regions. Equity Research HSBC Page 5

6 REASONS TO BUY With an intention of increasing its focus on fast-growing and profitable markets, in May 2013, HSBC announced the second round of its cost-cutting program with a target to save an additional $2 $3 billion by Though operating expenses increased in the first nine months of 2014 due to higher risk management and compliance costs, the company remains on track to achieve the next phase of strategy implementation. However, it continues to invest in core businesses by expanding in markets with growth potential. Despite the uncertain macro-environment, HSBC remains strong with respect to its balance sheet and capital position, which is definitely a competitive advantage over other banks. As of Sep 30, 2014, the company s capital ratios remained strong, driven by steady capital generation. We expect HSBC to keep growing on the back of its strong capital and liquidity position. Given its stable capital position, HSBC has been consistently paying dividends. The company did not stop paying dividend even during the financial crisis. It had last increased its interim dividend in 2013 by nearly 11.1% to $0.10 per share and, has maintained the same level since then. Further, the company expects to maintain a dividend payout ratio of 40% 60%. The company also plans to resume share repurchase activities going forward. HSBC s brand, capital strength, extensive global network and positioning enable it to continuously attract and retain clients in nearly 74 countries. Also, the company s product and service leadership in alternative investments, foreign exchange, credit, investment advice and many other cross-border banking services help it in widening the customer base. Moreover, HSBC has more than half of its operations in fast-growing emerging markets that are expected to outperform the developed economies in the long run. In an effort to further enhance its competitive advantage, the company is trying to increase its emerging-market exposure over time. REASONS TO SELL Revenue growth at HSBC is expected to remain sluggish in the subsequent quarters, as the low interest rate environment will continue to hamper revenue generation. In the first nine months of 2014, underlying revenues declined 3% year over year. Further, decreasing loan demand and lower trading income due to lesser client activity continue to weigh on overall top-line growth. As growth remains muted in the company s mature markets (Europe, the U.K, and U.S.), revenue is expected to remain under pressure in the upcoming quarters. HSBC s core business performance indicators such as net interest income, net fee income and net trading income remain unimpressive. As the sluggish economic recovery, coupled with the still low interest rate environment, is expected to put pressure on the core business drivers in the coming quarters as well, it would be challenging for HSBC to improve operating results based merely on uncertain benefits like lower impairment charges. Relatively high inflation and wage pressures in some key emerging markets, where HSBC is increasing its investments, could strain its business growth in the region. Housing price inflation in some of the Asian markets is very high, raising risks of more asset quality troubles for the company. Though the company s usually conservative nature may protect it to some extent, it will not be possible to remain absolutely unaffected. Equity Research HSBC Page 6

7 Regulatory reforms enacted and proposed in response to the persistent weaknesses in the financial sector, together with increased regulatory scrutiny, will require HSBC to maintain increased capital and may significantly impact its business model and the competitive environment. If the company is unable to meet capital requirements with an adequate buffer, it could experience the adverse effect of these factors on business and results. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HSBC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Copy Editor Content Ed. 11A Kalyan Nandy Swayta D. Shah Equity Research HSBC Page 7