A Detailed Look At How HSBC’s New Growth Plan Impacts Its Key Value Drivers

by Trefis Team
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HSBC (NYSE:HSBC) recently unveiled the growth strategy it intends to pursue over the coming years. The growth plan marks the end of the large-scale reorganization the geographically diversified banking giant has been undergoing since 2011 – something that resulted in a reduction in its global footprint through the disposal of many loss-making and non-core units worldwide. While the reorganization plan was essential given the changes in global regulatory requirements since the economic downturn, it led to a steady decline in revenues for HSBC over the years.

The bank is now aiming to grow its top line over the coming years by focusing its efforts on high-growth areas while keeping costs low and reallocating capital more efficiently. We capture the impact of the growth plan on various aspects of HSBC’s business model as a part of our interactive dashboard for the bank, parts of which are shown below.

We maintain our $55 price estimate for HSBC’s shares, which is about 10% ahead of the current market price.

See our full analysis of HSBC

The key changes proposed by HSBC in the new growth plan are detailed below:

  • Continue The Ongoing Push Into Key Asian Growth Markets: Asia is expected to remain HSBC’s key growth area for the foreseeable future, with the bank expected to invest considerably to garner more business in the economically growing region. HSBC intends to leverage its strong presence in Hong Kong for future growth there, besides continuing to channel investments in the Pearl Delta region. Additionally, HSBC is also looking to ramp up its wealth management offerings in Asia to be able to make the most of the rapid increase in the number of high net-worth individuals. These efforts should:
    • Boost HSBC’s Asia-Pacific Loan Portfolio over coming years
    • Drive growth in Asia-Pacific deposits
    • Improve Profit Margins, as the increase in expenses is likely to be at a slower rate than revenues

  • Improve Market Share In Its Home Market – U.K.: HSBC is expected to focus on growing mortgage operations in the U.K., and will also drive growth in small business lending by easing application process. This should help the bank reverse the poor loan growth it has witnessed in the country over recent years.
  • Leverage Leadership Position In Global Transaction Banking Industry To Boost Revenues In The High-Margin Business: Given HSBC’s #1 rank in global transaction banking, it makes sense for the banking giant to make the most of its geographical diversification to grow its Trade Finance and Securities Services operations further over coming years. While this will have a positive impact on client balances for the bank’s trade finance operation and on assets under custody for its securities services operation going forward, the high profit margins realized in these businesses will also help profit margins for HSBC’s Global Banking & Markets division (which also includes its investment banking operations).

  • Return U.S. Operations To Profit By Focusing On International Clients: HSBC has largely exited the retail banking space in the U.S. following its mortgage debacle in the wake of the economic downturn, and continues to prioritize the ongoing run-off of non-core U.S. loan portfolio. However, the importance of the U.S. in terms of trade finance will mean that the bank will focus its Retail Banking, Wealth Management, Commercial Banking as well as Investment Banking efforts in the U.S. on multi-national clients. This will allow the bank to grow its loan portfolio in the U.S. without incurring heavy costs associated with a full-fledged banking setup.

  •  Improve Returns By Reallocating Capital: HSBC aims to release excess capital from its U.S. operations and from its Securities Trading operations, and to transfer this to high-growth areas like Asia Retail and Wealth Management operations, and Transaction Banking. This will allow the bank to report a steady improvement in return on equity, despite the projected increase in total equity from strong operating performance, as well as the bank’s decision to hold dividend payout steady in the near future.

  • Invest In Technology To Lower Long-Term Costs And Improve Customer Service, And To Simplify Organization Structure: As a part of the overall growth plan, HSBC will invest $15-17 billion over the next three years to improve its presence in focus markets and strengthen its core infrastructure. The bank will also work on reducing business model complexity and simplifying client-facing processes. These changes are expected to result in sustainable gains across operating divisions for the bank in the long run by helping revenue grow at a faster rate than operating expenses.

We forecast HSBC’s EPS for full-year 2018 to be $3.44. Taken together with our estimated P/E ratio of 16 (which we believe is appropriate for the banking giant), this works out to a price estimate of $55 for HSBC’s shares.

In case you disagree with any of our forecasts, feel free to modify them in our interactive model to come up with your own forecast for HSBC

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