VALUATION HIGHLIGHTS

1. Commercial Banking constitutes 45% of the Trefis price estimate for HSBC's stock.
2. Retail Banking & Wealth Management (Europe Banking, Americas Banking, Asia-Pac & MENA Banking) constitutes 32% of the Trefis price estimate for HSBC's stock.
3. Investment Banking constitutes 12% of the Trefis price estimate for HSBC's stock.

Latest Earnings Q3'2023

HSBC reported total revenues of $16.16 billion in Q3 2023 - 40% more than the year-ago figure. It was primarily due to a 16% rise in the net interest income, followed by a significant jump in the other operating income.

HSBC Restructuring Plan

HSBC announced one of its largest restructuring plans - intending to reduce capital and costs in its underperforming businesses to enable continued investment in businesses with stronger returns and growth prospects. The bank plans to reduce the Risk-Weighted Assets from its Global Banking and Markets business in Europe and the USA and invest these assets in its Asia and the Middle East operations. HSBC expects to incur restructuring costs of around $6 billion and asset disposal costs of around $1.2 billion over 2020-2022, with the majority of restructuring costs incurred in 2020 and 2021.

Impact of coronavirus outbreak

HSBC posted total revenues of $49.5 billion in 2021, which was 2% less then the previous year figure. It was mainly due to a 4% drop in the net interest income. The net interest income improved in 2022 due to interest rate hikes and loan growth. We expect the trend to continue over the subsequent quarters. Notably, the firm reported total revenues of $51.7 billion in FY2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of HSBC’s value that present opportunities for upside or downside to the current Trefis price estimate for HSBC:

Investment Banking

• Advisory, Underwriting & Financing Revenues : HSBC generated $3.85 billion in fee revenues from its M&A advisory, debt & equity underwriting, as well as other capital financing services in 2021. We forecast the figure to grow at 2% over our forecast period. However, if these revenues were to decline at 5% each year over the same period due to a reduction in the bank’s share of the global capital markets, then this would mean a downside of 2% to the Trefis price estimate.
• Global Banking & Markets Division Operating Margin : HSBC’s Global Banking & Markets division encompasses the bank’s investment banking, treasury as well as custody banking services and is responsible for approximately 35% of its total pre-tax profits. However, this figure was unusually low in 2019 due to impairment and other one-time charges as a result of the restructuring plan undertaken by the bank. An important reason is that this division's operating margins have been more than 41% on average since 2011. The figure was around 32% in 2021. While we forecast margins of around 39% for the division by the end of our Trefis forecast period, decreased profitability from stricter regulatory requirements could potentially push this figure to as low as 30%. This would represent a downside of 6% to the Trefis price estimate.

For additional details, select a driver above or a division from the interactive Trefis split for HSBC at the top of the page.

BUSINESS SUMMARY

HSBC is one of the world's largest banking and financial services organizations, providing individuals, corporations, governments, and institutions in 71 countries with financial products and services ranging from retail banking, credit cards, corporate and investment banking, custody banking, and wealth management. HSBC earns most of its profits from its operations in Asia, especially in Hong Kong. Over the years, the bank has focused on improving its retail and commercial banking presence in emerging markets such as India, Latin America, and the Middle East.

SOURCES OF VALUE

Diversified Business Model Driving Sustained Growth

HSBC is a market leader in nearly every financial service, including retail banking, commercial banking, investment banking, wealth management, and custody banking. The diversified business model and the bank’s strong global presence allow HSBC to provide its individual and institutional customers with a wider range of services. Moreover, the business model also brings in significant cross-selling opportunities that are not readily available to its competitors.

Asia-Pacific & MENA Retail Operations Have Higher Cost Efficiency Than Europe

HSBC reported pre-tax profits of just above $5.70 billion on average for its Retail Banking & Wealth Management (RBWM) operations in Asia-Pacific & MENA regions over 2015-2019 from around $11.2 billion in revenues – representing an operating margin of over 49% for the period. In comparison, RBWM Europe made less than $500 million from 2015-2018, while the division incurred losses during 2019. The primary reason for this notable difference in operating efficiency is the bank’s extremely strong presence in Hong Kong and mainland China, where it has achieved economies of scale and scope. On the other hand, the bank’s spread-out network in Europe has resulted in high fixed costs even as slowing economic conditions in the region squeeze the top line.

KEY TRENDS

British Government’s Ratification of ICB’s Recommendation Requires Substantial Change To HSBC’s Structure

The British government has confirmed backing the stringent recommendations for U.K.-based banks laid out by the ICB late in 2011. The legislation has forced HSBC to face several difficult decisions owing to the “ring-fencing” recommendation that seeks to separate retail and investment banking operations by the end of 2019.

Recovery in interest rates

The European Central Bank (ECB) has increased interest rates in 2022 in response to the high inflation numbers.

High-interest rates would make it expensive for people to borrow money. While it will likely hurt the loan growth, the bank's net interest margin will benefit from improved interest rates.

Economic Recovery to Stimulate Wealth Management

As economic conditions eventually improve, we expect that investors’ risk appetites will also increase, which should drive investment and demand for wealth management services. Long-term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies, will also positively impact revenues and assets under management. However, the outbreak of coronavirus has adversely impacted economic recovery. The current impact of COVID-19 cannot be ascertained, but we expect growth to remain muted for at least the next few quarters.