Why Prolonged Unrest In Hong Kong Will Materially Hurt HSBC

by Trefis Team
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HSBC’s (NYSE: HSBC) success over the years has been driven primarily by the bank’s Asia region, and Hong Kong has been central to the bank’s growth. 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. After all, the geographically diversified banking group was established in Hong Kong in 1865. HSBC is also one of just 3 commercial banks in Hong Kong to issue banknotes (the others being Bank of China and Standard Chartered Bank), and it accounts for more than two-thirds of all bank notes in circulation in Hong Kong.

Trefis highlights the importance of Hong Kong for HSBC in an interactive dashboard and finds that Hong Kong is the most important geographic segment for the bank – accounting for nearly one-third of the bank’s revenues. While the banking giant’s other geographic regions have struggled, Hong Kong has achieved steady growth to gain prominence in HSBC’s business model. You can modify any of our key drivers to gauge the impact changes would have on HSBC’s valuation.

#1 Hong Kong Makes Up Nearly One-Third Of HSBC’s Total Revenues

  • Hong Kong is the single-largest country for HSBC in terms of revenues, and accounts for nearly 32% of the bank’s total revenues.
  • After declining in 2016, the country’s revenues have achieved robust growth and stood at $17.1 billion in 2018.
  • Retail banking & wealth management (RBWM) has been the largest growth driver – accounting for a bulk of the growth in the region.
  • Moreover, continued development of the Asian middle class and high savings rate have aided the bank’s Retail Banking growth in the region.

#2 Hong Kong’s Revenue Growth Has Outpaced The Consolidated Bank In Each Of The Last 4 Years

  • HSBC’s total revenue has declined nearly 10% since 2015, falling from $59.8 billion to less than $54 billion in 2018.
  • On the other hand, Hong Kong has flourished, with the country witnessing a growth of 19% over the same-time frame. The country’s revenues have gone up from $14.4 billion in 2015 to more than $17.1 billion in 2018.
  • Moreover, the country’s year-to-date 2019 results have been resilient, further highlighting the country’s importance to HSBC.
  • Although the ongoing protests in Hong Kong are likely to negatively impact the bank’s revenue growth in Q4 2019, Hong Kong is expected to drive the bank’s growth in the coming years.

#3 HSBC’s Hong Kong Revenues Are 4.5x That Of Its Rival, Standard Chartered’s Hong Kong Revenues

  • HSBC’s dominance in the region can be understood from the fact that no other European or U.S. bank has revenues remotely close to that of HSBC.
  • HSBC’s nearest European rival Standard Chartered, reported 2018 revenues that were just 21.5% of HSBC’s in Hong Kong.
  • Additional details regarding how revenues for Standard Chartered Bank have trended in Hong Kong are available in our interactive dashboard.

#4 Hong Kong Contributes A Bulk Of The Bank’s Pre-Tax Profits Thanks To Its Significantly Higher Margin

  • Hong Kong has the lowest adjusted cost-efficiency ratio (ratio of expenses to revenue) among all of HSBC’s geographic divisions, with the figure being 36.3% in 2018 .
  • Hong Kong operations reported a pre-tax profit of $11.5 billion in 2018, which was 58% of the bank’s total pre-tax profit for the year.
  • Moreover, the country’s pre-tax margin of 67% was nearly double the bank’s consolidated figure of 37%.

#5 Hong Kong Makes Up Around 30% Of HSBC’s Total Loans and Over 35% Of Its Total Deposits

  • As of 2018, Hong Kong’s total loan balance stood at $291 billion accounting for nearly 30% of the bank’s total outstanding loans of $982 billion while deposits of $485 billion made up 35% of the bank’s total deposits.
  • HSBC’s largest division, RBWM, is highly dependent on Hong Kong, with the country accounting for nearly 40% of the division’s total revenues and almost 86% of the profits in 2018.

To sum things up, Hong Kong is the core of the HSBC’s business model and the bank’s future growth hinges to a large extent on this region. Given the ongoing protests in the region which have adversely impacted customer sentiments, the bank is likely to have a difficult FY 2020.

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 12.1x, this works out to a price estimate of $42 for HSBC’s stock which is roughly 10% ahead of the current market price.

 

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