Can HSBC Brush Aside China Headwinds To Grow Revenues In 2019?

by Trefis Team
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HSBC (NYSE:HSBC) is one of the largest banks in the world, and arguably the most geographically diversified bank in the world with a presence in roughly 70 countries. HSBC had a successful fiscal 2018 with the bank’s revenue increasing by 4.5% to $53.7 billion while its net profit jumped by 30% to $12.6 billion. Trefis captures trends in HSBC’s Revenues over recent years in an interactive dashboard along with our forecast for the current year. We expect the bank to achieve steady revenue growth and add more than $3 billion to its top line in FY’19 primarily thanks to gains in RBWM and Commercial Banking divisions.

You can view the Trefis interactive dashboard to better understand the revenue trends and division-wise revenue performance, and alter the assumptions to arrive at your own estimate for the company’s revenues. In addition, here is more Trefis Financial Services company data

A Quick Look At HSBC’s Revenue Sources

HSBC’s business primarily includes 4 global businesses and Corporate Centre:

  • Retail Banking & Wealth Management (RBWM): This segment derives revenues by providing traditional banking and wealth management services to small businesses and consumers across the globe.
  • Commercial Banking: 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: 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: This includes HSBC’s revenues from private banking services to high net-worth individuals, and any other revenues from corporate balance-sheet management activities.
  • Corporate Centre: Revenues/Costs that are not allocated to global businesses are included in Corporate Centre. Moreover, the intra-Group elimination items for the global businesses are presented in Corporate Centre

Who Are HSBC’s Clients?

HSBC provides consumer banking, credit cards, commercial banking, investment banking, sales & trading, and wealth management services to Retail Consumers, Small Businesses, Corporates, Governments, Institutional Investors such as pension funds, mutual funds and hedge funds, High Net-worth Individuals.

How Has HSBC’s Historical Revenue Trended? 

  • HSBC has added more than $5.8 billion to total revenue since 2016 at an average annual rate of 5.9% led by steady growth across all operating segments.
  • RBWM, led by Asia has been the largest growth driver. Asia alone has added more than $5.5 billion to total revenues in the last three years while accounting for a bulk of the bank’s pre-tax profits.
  • Going forward, we expect HSBC’s revenues to increase by 6% and cross $57 billion in FY 2019.

 A Detailed Look At HSBC’s segment performance and revenue change over the years:

 Retail Banking & Wealth Management Is HBSC’s Largest Operating Segment

  • RBWM segment consistently contributes a majority of its revenues, with an average revenue share of more than 40% in the last four years.
  • Moreover, the segment’s share has marginally increased from less than 38% in 2015 to nearly 41% in 2018 primarily due to soft showing of the Global Banking and Markets division.
  • The segment grew by 7% year-over-year in fiscal 2018, contributing more than $1.4 billion to total incremental revenues.
  • We expect the segment to continue its sustained growth and record just shy of $22 billion in revenues in FY 2019.
  • The growth is expected to be driven on the back of higher lending and deposit balances, and from the positive impact of strong equity markets on insurance manufacturing revenues.

Commercial Banking Is HSBC’s Fastest-Growing Division

  • Commercial Banking has achieved robust growth in the last few years, with revenues increasing from $13.5 billion in 2016 to almost $15 billion in FY 2018 driven by continuous growth across all major products and regions.
  • We expect this segment to continue its strong growth, with revenues increasing at a rate of 5.6% to $16 billion in FY 2019.
  • However, lower interest rates and subdued global trade flows can potentially weigh on the segment’s performance.
  • The segment’s contribution to total revenues has steadily increased over the years – a trend which is expected to continue in the foreseeable future.

Global Banking and Markets Has Delivered A Mixed Performance Over The Past Few Years

  • Global Banking has added more than $420 million to total revenues in the last three years. Economic uncertainty and reduced primary issuance led to subdued client activity which adversely impacted the division’s revenues over 2016-2017
  • However, improved markets conditions towards the first half of 2018 helped this division achieve robust growth with the division growing at 7% and adding more than $1 billion to total revenues.
  • The segment’s share has declined from around 32% in 2016 to nearly 29% in 2018 and we expect this figure to decline further to around 26.5% in 2019.
  • Weak investor sentiment, geopolitical uncertainty and low interest rate environment are all likely to weigh on the division’s performance in 2019. As a result, we expect the division’s revenue to decline by 3% and remain just above $15 billion

Global Private Banking’s contribution has remained constant over the years

  • The segment’s growth has essentially remained flat over recent years, adding approximately $45 million in revenue over 2016-2018 (CAGR of 1.3%).
  • In 2019, we expect this segment to add nearly $60 million to total revenues likely  to driven by higher investment and lending revenues.
  • The segment’s share to total revenues has remained around 3% over the years, and going forward, we expect its share to remain constant at 3%.

Corporate Center

  • Corporate Center revenues have been volatile over the last few years.  The segment’s revenues has fluctuated from -$2.7 billion in 2016 to around $1.5 billion in 2017.
  • We expect this segment’s revenue to remain positive and contribute around $970 million to total revenues in 2019

Based on our forecasts, HSBC’s adjusted earnings per ADR for full-year 2019 is likely to be around $3.45 (with each U.S. ADR for the company representing 5 common shares). Using this figure with our estimated forward P/E ratio of 13x, this works out to a price estimate of $44 for HSBC’s stock which is roughly 15% ahead of the current market price.

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