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HSBC – BUY

HSBC; a strong Q3

We are encouraged on a number of points in HSBC Q3:-

  1. Capital is risen to 11.8% + 0.2% despite the drag from HSBC’s dividend. Capital is up 0.7% since the 31/12/ 2014 – an impressive rise.
  2. So far the HK franchise (Q3: PBT $1.81bn) (despite a drop in HK risk weighted assets of $8.9bn) has not seen a hit from China related slowdown.
  3. Total operating expenses fell $2.05bn hence good expense control
  4. $84bn decline in total risk weighted assets (RWAs) reflecting disposals in Brazil and Turkey but an increase in return on risk weighted assets to 2.1% from 1.5%. HSBC intends to cut RWA by $290bn by end 2017.
  5. The benefit of a few one off items; a) Debt valuation adjustment $1.1bn b) low 10.4% tax rate c) $1.24bn decline in other significant expenses primarily legal settlements v Q3 2014.
  6. Cost/ income ratio of 58.8% a 3.7% reduction on Q3 2014.
HSBC (PBT) Q3 2015 Q3 2014 Difference (Δ) COMMENT
Retail Banking 1,160 1,303 -143 10% drop in net interest income
Commercial Banking 2,226 2,295 -69 Similar performance
Global Banking /Markets 2,141 941 +1200 Trading +24%, expense-$1.1bn
Private Bank 81 190 -109 15% drop in net interest income
Other Business 489 -120 +609 One off items
“Significant”expense items -456 -1702 +1,246 Both PPI/ legal expense drop

Source; HSBC plc

EPS of 25 cents (9 months: 73 cents) leave HSBC on track to beat FY15 consensus forecasts of 52.88p (80 cents), the FY15 should be c 10 cents above consensus.

The board has flagged the potential for slippage in the time table for a decision on the domicile to the 2015 final results (due 23 Feb 2016). The UK press reported the board is considering a move to the USA as a credible alternative to Hong Kong. A move of the domicile would increase the possibility of a UK retail demerger, possibly ahead of the retail ring fencing rules by 2019. It would also mean a move of the primary listing due to FTSE Listing Rules for the parent co.

CONCLUSION

HSBC has been treated harshly in 2015 partly due to concerns over China/ HK lending but also ahead of the domicile decision. On fundamentals the stock is inexpensive on a forward multiple of just 9.5x and yield of 6.8% (net assets  c.598p).

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