What Is The Importance Of Asia To HSBC?

by Trefis Team
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HSBC (NYSE: HSBC) had a successful fiscal 2018, with Asia contributing approximately 90% of the bank’s pre-tax profits. The bank has an extremely strong presence in Hong Kong and mainland China, where it has been able to achieve economies of scale and scope. Asia is the most important segment for the bank and accounts for roughly 54% of its value, according to Trefis estimates. We have created an interactive dashboard analysis How Important Is Asia For HSBC’s Stock? You can adjust various drivers to see the impact on the segment’s earnings and its contribution to the company’s overall value, and see more Trefis Financial Services company data.

How Has The Asia Division Been Faring?

  • Segment revenues grew at a CAGR of 11.1% over the last 3 years.
  • Revenues of $28.8 billion in 2018 reflected a 11.5% y-o-y growth, and accounted for 49% of the total revenue mix.
  • Asia reported lowest cost-efficiency ratio of 43% amongst all the geographic divisions.
  • Pre-tax profit of $17.8 billion accounted for 89.5% of bank’s total pre-tax profit.

What’s Driving This Growth?

  • Retail Banking and Wealth Management constituted nearly 40% of the Asia segment’s revenues in 2018, and we expect this trend to continue in the near future.
  • Trends such as urbanization and internationalization of trade, particularly in China, boosted the bank’s growth in RBWM.
  • Similarly, continued development of the Asian middle class and high savings rate have aided the bank’s Retail Banking growth.

What To Expect In The Near Term

  • We forecast HSBC’s Asia revenues to grow 11% in 2019 to $32 billion, primarily driven by growth in Hong Kong and Mainland China.
  • Rapid urbanization in China, which is expected to reach 60% by 2030, will further support revenue and deposit growth.
  • Escalating U.S.-China trade tensions and Brexit will likely negatively impact the bank’s revenue growth in 2019.
  • However, Asia’s changing demographics and economic growth trends are likely to outweigh these factors.

 What’s The Contribution of Asia To HSBC’s Value?

  • We estimate that Asia accounts for nearly 54% of HSBC’s value.
  • Our estimate is based on $32 billion revenue potential, a net margin of 25%, similar to that for the overall bank, and a forward price to earnings multiple consistent with the current 13x.
  • We currently have a price estimate of $50 for HSBC which is slightly below the stock’s 52 week high and almost half of its pre-financial crisis valuation.
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