HSBC (HSBC) Last Update 6/3/21
Related: BAC C GS UBS
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
HSBC
$33.36
Yours
Trefis Price
N/A
$27.71
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

HSBC Company

VALUATION HIGHLIGHTS

  1. Retail Banking & Wealth Management (Europe Banking, Americas Banking, Asia-Pac & MENA Banking) constitutes 45% of the Trefis price estimate for HSBC's stock.
  2. Commercial Banking constitutes 34% of the Trefis price estimate for HSBC's stock.
  3. Investment Banking constitutes 14% of the Trefis price estimate for HSBC's stock.

Latest Earnings Q1'2021

HSBC reported better than expected performance in Q1 2021, with the bank's revenues touching $13 billion -- down 5% y-o-y. The revenues decreased due to 14% y-o-y drop in the net interest income. That said, global banking and markets delivered a 7% y-o-y growth driven by higher markets and securities services revenues. Further, the bank's operating income increased from $3.2 billion to $5.8 billion in Q1 2021, due to lower provisions for credit losses.

HSBC Restructuring Plan

HSBC announced one of its largest restructuring plan where the bank intends 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. Moreover, the bank has suspended share buy-backs for 2020 and 2021.

Impact of Covid-19

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. HSBC’s retail business, in particular, was the worst-hit due to the slowdown as new loan issuance suffered. This impact was exacerbated by falling interest rates, which negatively impacted the bank’s net interest income. Moreover, the bank’s provision for loans increased due to the risk of default. That said, the bank has reduced its provisions figures in Q1 2021, signaling some improvement in the loan repayment capability of the customers. We expect it to continue in the subsequent quarters, benefiting its operating income.

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 $4 billion in fee revenues from its M&A advisory, debt & equity underwriting, as well as other capital financing services on average over 2015-19. We forecast the figure to grow annually at 2% over our forecast period. However, if these revenues were to decline at 5% each year over the same period as a result of a reduction in the bank’s share of the global capital markets, then this would mean a downside of 2.5% 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 for this is the fact that operating margins for this division have been more than 41% on average since 2011. While we forecast margins of around 42% for the division over the Trefis forecast period, decreased profitability from stricter regulatory requirements could potentially push this figure to as low as 30% by the end of this period. This would represent a downside of 6% to the Trefis price estimate.

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

BUSINESS SUMMARY

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.

SOURCES OF VALUE

Diversified Business Model Driving Sustained Growth

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.

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

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.

KEY TRENDS

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

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.

Central Banks Cut Interest Rates and Increase Lending

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.

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.