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Below are key drivers of HSBC’s value that present opportunities for upside or downside to the current Trefis price estimate for HSBC:
For additional details, select a driver above or select a division from the interactive Trefis split for HSBC at the top of the page.
HSBC is one of the largest banking and financial services organizations in the world, which provides individuals, corporations, governments, and institutions in 71 countries financial products and services ranging from retail banking, credit cards, corporate and investment banking, custody banking, and wealth management. HSBC earns a bulk 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.
HSBC is a market leader in nearly every financial service, which includes retail banking, commercial banking, investment banking, wealth management as well as custody banking. The diversified business model, coupled with the bank’s strong global presence, allows HSBC to provide its customers - individual and institutional - a wider range of services. Moreover, the business model also brings in significant cross-selling opportunities that are not readily available to its competitors.
HSBC reported pre-tax profits of just above $5.70 billion on an average for its Retail Banking & Wealth Management (RBWM) operations in Asia-Pacific & MENA regions over the period 2015-2019 from revenues around $11.2 billion – representing an operating margin of over 49% for the period. In comparison, RBWM Europe made less than $500 million over 2015-2018 while the division made 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 been able to achieve 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.
The British government has confirmed its backing of 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.
In response to worsening conditions in global credit markets and the threat of economic downturns, central banks across the globe slashed interest rates to entice banks to lend money. The U.S. Federal Reserve cut its target federal funds rate from 2% in July 2008 to 0.25% in July 2009 and kept it at near-zero levels for more than six years before hiking the figure by 25 basis points in December 2015. The Fed increased the interest rate to 2.25% in 2018, but the rates still remain below the historical average level. However, the Fed has again cut interest rates by 225 basis points since 2019 and interest rates are now again at near-zero levels.
Deposit-taking banks like HSBC stand to benefit from these rate cuts since interest rates represent the cost of borrowing money, meaning that lower rates make it cheaper for people to take out loans and use other credit products offered by financial services firms.
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.