HSBC’s Focus On Asia Retail Banking Operations Continues To Drive Growth

HSBC (NYSE: HSBC) recently released its Q1 2019 results. The largest European bank handily beat consensus revenue and earnings expectations. HSBC’s first quarter net profit jumped 31% year-over-year to $4.8 billion while revenues increased 5% to $14.4 billion driven by solid performance across all operating divisions, especially its Retail Banking and Wealth Management (RBWM) division.

Per Trefis estimates, HSBC’s shares have a fair value of $49, which is roughly 15% ahead of the current market price. We have summarized our full-year expectations for HSBC in our interactive dashboard – How Did HSBC Fare in Q1 and what can we expect for full-year 2019?. You can modify any of our key drivers to gauge the impact changes would have on its valuation. Also you can find more Trefis Financial Services company data here.

A Quick Look at HSBC’s Revenue Sources

HSBC reported $53.8 billion in Total Revenues in Fiscal 2018. This included 4 primary revenue streams:

• Retail Banking & Wealth Management: $22 billion in FY 2018 (41% of Total Revenues). This segment derives revenues by providing traditional banking and wealth management services to small businesses and consumers across the globe.
• Commercial Banking: $15 billion in FY 2018 (28% of Total Revenues). This segment generates revenues by providing commercial banking services to customers through its four operating units: Credit and Lending, Global Trade and Receivables Finance, Payments and Cash System, and Insurance and Investments.
• Global Banking and Markets: $15.6 billion in FY 2018 (29% of Total Revenues). Revenues for this segment are derived by providing services to institutional, corporate and wealth management clients to help them raise capital, grow their businesses, invest and manage risks.
• Global Private Banking & Corporate Center: $1.2 billion in FY 2018 (2% of Total Revenues). This includes HSBC’s revenues from private banking services to high net-worth individuals, and any other revenues from corporate balance-sheet management activities.

Key Takeaways From HSBC’S Q1 Results

RBWM Division Had A Solid Q1

• Retail Banking and Wealth Management Division’s adjusted revenues surged 10% (YoY) to $6 billion on the back of higher lending and deposit balances, and from the positive impact of strong equity markets on insurance manufacturing revenues. Additionally, improved net interest margins from the improving interest rate environment, and a one-time gain of $133 million from the disposal of units in Argentina and Mexico aided the division’s top-line growth.
• RBWM reported adjusted profit before tax of $2.2 billion, up 19% from Q1 2018. However, operating expenses grew 5% due to increased staff costs and inflation (particularly in Asia), and due to increased investment in its ongoing strategic growth initiatives. The RBWM business has been pivotal to HSBC’s success over the years and this division will continue to drive its growth in the future.

Asia Continues To Lead HSBC’s Growth

• HSBC’s revenues from Asia grew by 11% year-over-year to $28.8 billion in 2018 and accounted for nearly 49% of the total revenue mix while the division’s pre-tax profits of $17.8 billion represented nearly 90% of the bank’s total pre-tax profits. This trend continued in Q1 despite a soft-growth environment in Asia. The bank’s Asia revenue surged by 7% (YoY) to $7.8 billion led by robust growth in Mainland China and in the ASEAN region while pre-tax profit increased by 5% to $5 billion (80% of the bank’s total pre-tax profit).
• We forecast HSBC’s Asia revenues to grow 11% in 2019 to $32 billion, primarily driven by growth in Hong Kong and Mainland China. Although China’s economy faces domestic and external pressures, we believe that it will remain the core growth area for the banking giant.

Cost Efficiency Ratio Likely To Improve

• HSBC has been extremely successful in reducing its costs over the years, with non-interest expense falling from $39.8 billion in 2015 to $34.6 billion in 2018 (indicating a 4.5% reduction in costs on average each year). This helped the bank improve its adjusted cost efficiency ratio to 62.5% in 2018 from 66.5% in 2015.
• During the first quarter, the bank was able to reduce its adjusted operating expenses by 12% year-on-year, resulting in a cost efficiency ratio of 57% (from 68.4% in Q1 2018). For the full year, we forecast the bank’s unadjusted cost efficiency ratio to improve to 62%, thus providing a boost to the bank’s bottom line.

Performance Vs Peers

• HSBC outperformed its U.K. banking peers RBS and Barclays in Q1 2019. RBS and Barclays reported year-over-year decline in revenues while HSBC witnessed a 5% increase in revenues led by strong performance in Asia by its RBWM division.

Outlook for Full-Year 2019

• For the full year, we expect HSBC’s revenues to grow by 9% to $58.5 billion while net income margin is expected to improve from 23% in 2018 to 25% in 2019 on the back of strong revenue growth, lower operating expenses and a lower effective tax rate.
• We expect the bank’s EPS for full-year 2019 to be around $0.73. Using this figure with our estimated forward P/E ratio of 13.5, this works out to a price estimate of $49 for HSBC’s shares (as each U.S.-listed “share” is an ADR that represents 5 actual shares of the company). Our estimate is roughly 15% ahead of the current market price.

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