EAST ASIA SECURITIES COMPANY LIMITED 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile:

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Paul Sham 23 rd February HSBC HOLDINGS PLC ( 匯豐控股 ) Sector : Banking Group Chairman : Douglas Flint HKSE Code : Market Price : HK$49.15 (23/02/2016) Group Chief Executive : Stuart Gulliver Shares Issued : 19,686m Mkt. Cap. : HK$967,567m Group Finance Director : Iain Mackay 52 weeks Hi/ Lo : HK$78.25/HK$47.80 HSI : 19, (23/02/2016) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2015 Final Results Highlights US$ million Vs FY2014 (%) Vs 30/06/2015 (%) Net interest income 32, % Non-interest income 27, % Total operating income 59, % Operating expenses (39,768) -3.6% Operating profit before impairment losses 20, % Allowances for credit and other losses (3,721) -3.4% Profit before taxation and non-core items 16, % Non-core items 2, % Profit before taxation 18, % Taxation (3,771) -5.1% Attributable profit to equity holders 13, % Total loans 1,024, % -4.5% Total deposits 1,289, % -3.5% Total assets 2,409, % -6.3% Basic EPS (US$) % 3rd & 4th interim DPS (US$) % Total DPS (US$) % Selected Ratios FY2015 FY2014 1H2015 Net interest margin 1.88% 1.94% 1.92% Cost-income ratio 66.5% 67.3% 58.2% Return on average asset 0.60% 0.50% 0.74% Return on average equity 7.2% 7.3% 10.6% Impaired loan ratio 2.32% 2.66% 2.34% Impaired advances coverage 40.2% 42.1% 38.8% Loan-deposit ratio 79.4% 81.4% 80.3% Common Equity tier 1 CAR 11.9% 10.9% 11.6% Tier 1 CAR 13.9% 12.5% 13.4% Total CAR 17.2% 15.6% 16.3%. FY15 results missed market forecasts HSBC Holdings reported 2015 full-year pre-tax profit of US$18,867m, up 1.0% y-o-y, much lower than the market consensus of US$21,672m. Excluding favourable movement in significant items such as lower fines, settlements, UK customer redress and associated provisions (down by US$1.3bn in total) and a gain on the partial disposal of Industrial Bank (US$1.4bn), profit before tax was down by 7% from Despite lower earnings, HSBC raised its fourth interim dividend to US$0.21 per share, US$0.01 higher than the fourth interim dividend in respect of This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.

2 Net interest income amounted to US$32,531m, down 6.3% y-o-y, dragged by adverse foreign exchange movement. Excluding such impact, net interest income was broadly unchanged compared with 2014, as increases in Asia and Latin America were offset by a reduction in North America. In respect of margins, HSBC s net interest margin was marginally lower due to reduced yields on customer lending in Europe and North America. Non-interest income increased by 2.7% y-o-y to US$27,269m, boosted by the disposal gain of Industrial Bank (+US$1.4bn) as well as favourable fair-value movement of its own debt (+US$1.0bn). Net trading income jumped 29% y-o-y driven by HSBC s GB&M (Global Banking & Markets) businesses, primarily in the UK following an increase in volatility and client activity. Nevertheless, the strong trading income was largely offset by weak fee income, which was down 7.8% y-o-y, as a result of adverse currency movement. Operating expenses fell 3.6% y-o-y to US$39,768m, helped by the favourable effect of currency translation as well as a reduction in fines, penalties, redress and associated provisions. Excluding the above impact, the adjusted operating expenses increased by 5% y-o-y, mainly reflecting investment in Latin America, Asia and Europe and the Group s restructuring cost. The number of employees, expressed in full-time employees, at 31 December 2015 was 255,203, a decrease of 4,585 from 30 June 2015 reflecting the initial impact of cost saving initiatives. Loan impairment charges were 3.4% lower than in 2014, also helped by favourable impact of currency translation. Excluding the currency impact, the adjusted LICs were 17% higher. Thanks to the continuous disposal of higher-risk loan portfolio, HSBC s impaired loan ratio further improved to 2.32% at end-2015, from 2.66% a year ago. Capital position HSBC s Common Equity tier 1 (CET1) CAR and core tier 1 CAR were strengthened to 11.9% and 17.2% respectively at end-2015, from 10.9% and 15.6% respectively at end-2014, largely due to reduction in risk-weighted assets (RWAs). Business Review by Geographies Pre-tax profit by geographic areas FY2015 FY2014 (US$ million) (%) (US$ million) (%) y-o-y (%) Europe % 1, % -37.7% Asia 15, % 14, % +7.8% Middle East & North Africa 1, % 1, % -15.8% North America % 1, % -56.7% Latin America % % +43.5% Total 18, % 18, % +1.0% Asia continued to be the key profit contributor, accounting for 83.5% of HSBC s total pre-tax profit in FY15. Pre-tax profit in Asia increased 7.8% y-o-y, as the top-line was boosted by strong foreign exchange, equities, capital financing and securities services as well as the partial disposal of Industrial Bank (US$1.4bn). On the other hand, Latin America recorded 43.5% y-o-y jump in pre-tax profit, thanks to much lower impairment charges as the prior year included a significant GB&M charge. Pretax earnings in Europe fell 37.7% y-o-y, dragged by the increased bank levy as well as rising costs on regulatory programs and compliance area. MENA s pre-tax profit dropped 15.8% y-o-y, attributable to higher loan impairment charges in UAE. North America was the worst performing region, with pre-tax profit down 56.7%, due to continued run-off of the CML portfolio. 2

3 Outlook & Prospects A big miss in 4Q results HSBC recorded a pre-tax loss of US$0.9bn in 4Q15, vs US$1.7bn in 4Q14. The results were much lower than US$2.1bn 4Q15 consensus, as top-line growth slowed due to weaker GB&M revenues as well as a lower contribution from other division. At the same time, loanimpairment charges spiked in 4Q15, driven by charges in the oil & gas sector, higher collective impairments in Brazil and lower releases form the US CML (Consumer and Mortgage Lending) book. Adjusted pre-tax profit fell in every single geographic region and almost every single business line, which implies slower growth momentum heading to In terms of geographical location, Asia contributed nearly 157 % of total pre-tax profit in 4Q15. The heavily reliant on Asia markets fuel investors worries that slower growth in Asia would kick off a rise in bad loans and lower revenue for HSBC. Little capital pressure Despite the big miss in 4Q results, HSBC s capital base is steadily improving, with its CET1 CAR standing firm at 11.9% at end-2015, which is the strongest among large global banks. On the other hand, HSBC is almost halfway towards its target of slashing risk-weighted assets. HSBC had stripped out US$124bn of RWAs, mostly in its investment bank. In total, HSBC aims to cut US$290bn of RWAs by 2017 and to redeploy about half to higher return areas, such as the Pearl River Delta region of southern China. If the US$5.2bn sale of its Brazilian operation to Banco Bradesco is completed in the first half of this year, HSBC s CET1 CAR would rise to 12.5%, i.e. the middle of its target range. Furthermore, the move of raising the fourth interim dividend by US$0.01 per share suggests the current CET1 ratio is at a comfortable level from Management s point of view. Therefore, HSBC is believed to have little capital raising pressure in the near term. Dividend may not be sustainable if earnings fall further Despite core earnings decline, HSBC maintained its a progressive dividend policy by raising its fourth interim dividend by US$0.01 per share to US$0.21 per share. Nevertheless, HSBC s ability to deliver on that pledge is clearly weakening. In 2014, HSBC paid dividends of 50 cents a share on 69 cents of earnings per share. For 2015, it proposes a 51-cent payout on 65 cents of EPS. If earnings fall further in 2016, as consensus estimates predict, the bank may have to dip into reserves to maintain its dividend. Valuation Markets will likely revise down the earnings forecasts of HSBC after it reported lower income and higher impairment in 4Q15. Macro-economic headwinds will likely persist in 2016 and chances for earnings rebound are remote for HSBC. On the bright side, HSBC s cost savings and RWA reduction plans are still on tracks, which may drive earnings recovery in the medium term. In addition, HSBC s relatively strong capital base will help sustain its decent dividend yield of 8.1%. Trading at 0.69x FY16E P/B and 8.7x FY16E P/E, valuations of HSBC are undemanding and we recommend a Hold rating on the counter. Recommendation: Hold 3

4 Appendix I I. Impairment provisions of HSBC Holdings As % of total customer advances Individual allowance Portfolio allowance Non-performing loans As of 31/12/ % 0.41% 2.32% As of 30/6/ % 0.38% 2.11% As of 31/12/ % 0.56% 2.66% II. Comparison of HSBC Holdings loan book: 31/12/2015 vs 31/12/2014 Loans-by economies 31 st Dec, 2015 Up/(down) 31 st Dec, 2014 US$ million US$ million Europe 414, % 436,135 Asia 412, % 427,271 Middle East & North Africa 39, % 40,945 North America 137, % 139,832 Latin America 21, % 55,012 1,024, % 1,099,195 III. Breakdown of loan book of HSBC Holdings 4

5 Important Disclosure / Analyst Certification / Disclaimer This document is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited (BEA). The research analyst primarily responsible for the content of this report, in part or in whole certifies that the views on the companies and their securities mentioned in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. The information is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. Information and opinions expressed herein reflect a judgment as of the date of this document and are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is not to be taken in substitution for the exercise of judgment by respective readers of this report, who should obtain separate legal or financial advice. East Asia Securities Company Limited and / or The BEA Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein the report, while BEA along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its associates, its directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company or companies mentioned in the report. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. 5