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Financials | Company Research
SWS Research Co. Ltd is a subsidiary of ShenwanHongyuan Securities.
99 East Nanjing Road, Shanghai | +86 21 2329 7818
www.swsresearch.com
Bringing China to the World
12 June 2017
增持
首次覆盖
大象起身
汇丰控股 (5 HK)
Market Data: May 9
Closing Price (HK$)
68.6
Price Target (HK$)
79.9
HSCEI
10592
HSCCI
4066
52-week High/Low (HK$)
68.60/44.50
Market Cap (USD Mn)
179,193
Market Cap (HK$ Mn)
1,397,765
Shares Outstanding (Mn)
20,376
Exchange Rate (RMB-HK$)
1.15
Price Performance Chart:
Source: Bloomberg
Analyst
Vivian Xue
A0230511110001 BBE746
xuehr@swsresearch.com
Financial summary and valuation
2015
2016
2017E
2018E
2019E
Net interest income (USD M)
32,531
29,813
28,080
30,071
31,592
YOY (%)
(6.26)
(8.36)
(5.81)
7.09
5.06
Net income (USD M)
12,572
1,299
10,197
11,003
11,955
YOY (%)
(4.14)
(89.67)
685.01
7.90
8.66
EPS (USD)
0.65
0.07
0.55
0.59
0.64
BVPS (RMB)
8.73
7.91
7.94
8.02
8.13
ROAE (%)
6.64
0.71
5.80
6.22
6.68
NPL ratio (%)
2.32
1.90
2.02
1.88
1.79
Core tier 1 CAR (%)
11.86
13.60
13.70
13.80
13.90
P/E (x)
13.58
126.13
16.07
14.89
13.70
P/B (x)
1.01
1.12
1.11
1.10
1.09
汇丰银行成立于 1865 年，是全球第四大银行。汇丰通过四大环球业务零售银行及财富管理、工商金融、环球银
行及资本市场和环球私人银行，为亚洲、欧洲、北美、中东北非和拉美等五大洲客户提供全方位的金融产品和服
务。我们认为公司基本面正在持续改善，估值溢价有望继续扩大，首次覆盖给予增持评级。
一、从基本面来看，我们相信汇丰银行将成为全球经济企稳和利率曲线上移的最大受益者。伴随全球经济系统
性风险逐渐缓解，主要发达经济体的货币宽松显著放缓，推动了利率曲线上移，在此背景下，负债端融资能力
强，资产端扩张潜力大的银行将脱颖而出。展望 2017 年，我们预计汇丰贷款增长提速，净息差逐步改善，成本
保持稳定，资产质量稳固，收入和盈利增速提升，ROE 企稳回升，资本实力增强，高分红持续并且可能会继续回
购股份。基本面的见底回升主要归功于公司着重亚洲市场的策略带来的资产扩张潜力以及零售优势带来的强大
融资能力。
（1）从资产端扩张潜力来看，我们认为由于亚洲市场拥有更理想的净息差和资产质量水平，因此着重亚洲市场
的策略将会给予汇丰银行更大的资产扩张潜力。作为汇丰银行的发源地，亚洲始终是汇丰银行的战略焦点且其重
要性将日益提升。亚洲市场在公司总资产中的占比由 2006 年的 24%逐步上升到 2016 年的 38%，而对调整前税前
利润的贡献度由 2006 年的 39%上升至 2016 年的 194%。截止 2016 年底，亚洲占公司加权风险资产的 38%，并贡献
了74%的调整后税前利润。
我们发现亚洲市场拥有更理想的净息差和资产质量水平：从净息差来看，公司亚洲地区的净息差在汇丰覆盖的五
个地区中稳居前三，达到 1.9%，并在 2017 年一季度提升了 8个基点，高于集团净息差 4个基点的升幅。亚洲在
净利息收入的贡献度也由 2006 年的 22%大幅提升至 2016 年的 42%。从资产质量来看，公司亚洲地区的不良贷款
率在五大地区中保持最低，仅为 0.7%。亚洲在公司不良贷款中的占比仅从 2006 年12%小幅提升至 2016 年的 14%，
而亚洲在公司贷款拨备中的占比也仅从 2006 年的 7%上升至 2016 年的 20%。因此着重亚洲市场的策略将会给予汇
丰银行更大的资产扩张潜力。
（2）从负债端融资能力来看，2016 年底公司的存款和发债在总负债中的比例达到 82%，总资本充足率达到 20%，
两项指标在全球同业中均位列首位。这主要是归功于公司在零售业务上的优势。汇丰银行将其业务分为四个部
门：为个人客户提供服务的零售银行和财富管理（RBWM），为企业提供服务的工商金融（CMB），为大型跨国公
司提供专业金融支持的全球银行与资本市场（GB&M）以及为高净值客户提供财富管理服务的环球私人银行
（GPB）。这种综合性的商业模式可以产生理想的协同效应，而其中零售银行业务是公司存款的主要来源，也是
提升其融资能力和资本实力的核心。零售业务在公司总存款的占比由 2006 年的 43%稳步上升至 2016 年的 46%，
但零售业务在公司总资产中的占比从 2011 年就一直维持在 17%的低位。因此低资本消耗的零售业务对公司融资能
力贡献显著，并有效提升了公司资金实力。
二、从估值来看，伴随全球货币政策和行业监管的收紧，银行业经营前景不确定性上升，因此资本实力强大和
风险管理审慎的银行将拥有更高的估值溢价。汇丰一直以来都以风格稳健著称，截至 2017 年一季度末，公司普
通股权一级资本充足率高达 14.3%，远高于全球同业。依赖坚实的资本基础，除了每年稳定的 51 美分股息，公司
在2016 年四季度至 2017 年一季度之间，还回购了价值 35 亿美元的股份。我们预计在可预见的将来，汇丰将维
持每年 51 美分的股息，并择机进行回购。因此在货币政策和行业监管趋紧的背景下，公司强大的资本实力、稳
健的经营风格和丰厚的股息率对于价值投资者极具吸引力，估值溢价有望进一步扩大。
盈利预测：基于全球经济企稳带动融资需求回升和汇丰领先的市场地位，我们预测公司的资产增速将会提升。由
于利率水平止跌回升，汇丰净息差将逐步改善。基于经济企稳和公司审慎的资产配置，我们相信公司资产质量将
逐步企稳。因此我们预测公司 17-19 年净利润分别为 102/110/120 亿美元，对应同比增速分别为
685%/7.9%./8.7%。同时我们预测公司 17-19 年EPS 分别为 0.55/0.59/0.64 美元。
估值和投资建议：通过三阶段股利贴现模型以及相对估值法，我们得出 76.8 港币的目标价。（1）就绝对估值法
而言，我们的核心假设包括 2019-2028 的年净利润增速为 5%且分红率为 80%，而 2029 年后我们假设净利润增速
为4%且分红率为 75%，无风险利率为 2.9%，市场风险溢价为 7%，市场波动系数为 0.9，公司的折现率为 9.3%，
由此我们得出 76.4 港币的内含价值。（2）就相对估值法而言，同业目前估值水平对应 15 倍的市盈率和 1.2倍
的市净率。基于汇丰与同业在盈利能力、资本实力、资产质量、资产质量和派息政策的横向对比，我们认为汇丰
合理的估值水平应为 1.35 倍2017 年PB，由此得出目标价 83.3 港币。综合两种方法，我们给予汇丰 79.9 港币的
目标价，对应 16%的上行空间，首次覆盖给予增持评级。
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Financials | Company Research
SWS Research Co. Ltd is a subsidiary of ShenwanHongyuan Securities.
99 East Nanjing Road, Shanghai | +86 21 2329 7818
www.swsresearch.com
Bringing China to the World
The rising giant. HSBC was founded in 1865, and now it is the fourth largest bank in the world
in terms of total assets at end 2016. We give it an outperform rating due to its upcoming
fundamental improvements and enlarging valuation premium.
Upcoming fundamental improvements. From the fundamental side, HSBC will be one of the
largest beneficiary amid the rising interest rate curve and stabilizing global economy. This
should be attributed to its asset growth potential backed by Asian focus and strong funding
capability backed by its retail advantage. (1) From the asset side, we believe the Asia focus
could give HSBC larger growth potential due to leading NIM and asset quality in Asia. Asia
remains its primary focus. As of end 2016, Asia accounted for 38% of its risk-weighted assets
but contributed 74% of the firm’s pre-tax profits. And we find Asia outperform the other
regions in terms of NIM and asset quality. On the one hand, NIM in Asia remained the third
highest at 1.9% among the five regions of HSBC and it rallied by 8bps in 1Q17 as compared
to 4bps increase for the group. Its contribution in the firms’ net interest income increased
from 22% in 2006 to 42% in 2016. On the other hand, its NPL ratio in Asia remained the lowest
at 0.7% among the five regions. Its proportion in the firms’ NPLs only slightly increased from
12% in 2006 to 14% in 2016. (2) From the funding side, the proportion of deposits and debts
issued in its total liabilities reached 82% and its CAR reached 20% as of end 2016, both ranking
first among its global peers. This is mainly attributed to its retail advantage. Retail banking is
the core of its funding capability and it is an effective way to control its asset expansion and
enhance capital position. The proportion of RBWM in its total deposits increased from 43%
in 2006 to 46% in 2016, while its proportion in its total assets remained low at 17% since
2011. So the RBWM business makes up a significant proportion of the firm’s the deposits.
Enlarging valuation premium. From the valuation side, we expect its strong capital position
would lead to an enlarging valuation premium amid strengthening monetary policy and
industry regulation. HSBC has always been a bank with strong liquidity and capital. As of end
1Q17, common equity tier 1 ratio rose to as high as 14.3%, much stronger than peers. Backed
by strong surplus capital, HSBC started to do share buybacks in addition to 51cents of
dividend. So far, HSBC have bought back USD3.5bn of shares during 4Q16-1Q17 and HSBC
may do more share buybacks in the future. And HSBC has always been generous in dividend
payout and aims to maintain dividend stable for the foreseeable future. More than 6% of
dividend yield is very attractive to income funds, like insurance companies with focus on high
yield, good liquidity and possible business synergies.
Initiate with Outperform. Looking forward, we expect HSBC to report a growing loans book,
widening margins with higher interest rates, rising revenue growth, flat costs, consolidating
asset quality, recovering earnings growth, sound ROE, enhancing capital position, sustaining
high dividend and possible share buybacks. We forecast EPS of USD0.55 in 17E, USD0.59in
18E and USD0.64 in 19E. Through a three-stage dividend discount model and relative
valuation model, we derive a target price of HK$79.9 for HSBC. With 16% upside potential,
we initiate our coverage with Outperform rating.
Please refer to the last page for important disclosures Page 1
June 12, 2017
Financials | Company Research
HSBC at a glance
HSBC, founded in 1865, is the fourth largest bank in the world in terms of total assets at
end-2016, counting over 47m customers worldwide. The company has set up 4,400
branches across 71 countries from Asia, accounting for the bulk of the firm’s income and
pre-tax profits, to Europe, Americas and the Middle East and Africa. The company breaks
down its business into four major divisions; retail banking and wealth management
(RBWM), commercial banking (CMB), global banking and markets (GB&M) and global
private banking (GPB).
In addition to its Hong Kong listing, HSBC is listed in London (HSBA:LN) and New York
(HSBC:US).
Fig 1: Five operation regions
Source: Company data, SWS Research
Please refer to the last page for important disclosures Page 2
June 12, 2017
Financials | Company Research
Fig 2:Four major global business
Source: Company data, SWS Research
Fig 3: Global banks ranked by asset scale (2016)
Code
Company
Listing date
Total
assets
(US$bn)
Total
shares
(bn)
Market
cap
(US$bn)
Net
assets
(US$bn)
Net
profit
(US$bn)
16A
PB(x)
16A
PE(x)
Dividend
yield
601398 CH
Industrial & Commercial Bank
of China
27/10/2006
3,425
356.41
241
272
21.87
0.89
5.7
4.85%
601939 CH
China Construction Bank
25/9/2007
2,877
250.01
206
219
19.42
0.83
5.18
4.58%
601288 CH
Agricultural Bank of China
15/7/2010
2,720
324.79
154
183
15.31
0.82
5.74
5.10%
5 HK
HSBC Holdings
2/1/1980
2,608
19.81
176
198
6.36
0.95
11.59
6.04%
601988 CH
Bank of China
5/7/2006
2,563
294.39
156
207
13.55
0.79
5.51
4.61%
JPM US
JP Morgan Chase & Co
5/3/1969
2,466
3.61
323
252
10.66
1.41
14.92
2.08%
BAC US
Bank of America
5/6/1979
2,187
10.22
248
267
6.09
1.02
18
1.02%
WFC US
Wells Fargo & Co
10/12/1962
1,889
5.05
292
203
10.26
1.66
14.31
2.61%
C US
Citigroup
29/10/1986
1,819
2.91
171
233
6.87
0.81
12.75
0.70%
DB US
Deutsche Bank
9/11/1999
1,803
1.38
27
67
0.23
0.41
13.64
0.00%
GLE FP
SocieteGenerale
2/1/2007
1,416
0.81
37
66
4.25
0.54
8.72
5.09%
601328 CH
Bank of Communications
15/5/2007
1,158
74.26
64
81
5.48
0.76
6.28
4.05%
RY US
Royal Bank of Canada
5/11/1999
1,150
1.44
112
68
4.99
2.29
14.57
3.27%
GS US
Goldman Sachs
4/5/1999
897
0.41
105
87
2.83
1.32
14.94
1.04%
2888 HK
Standard Chartered
31/10/2002
661
3.28
31
49
0.39
0.68
50.02
0.00%
11 HK
Hang Seng Bank
20/6/1972
170
1.91
40
18
1.03
2.22
20.62
3.74%
23 HK
Bank of East Asia
2/1/1980
97
2.68
11
11
0.24
1.07
24.19
1.70%
Source: Company data, SWS Research
Note: The exchange rate, market value and valuation data are based on May 2017 market data.
Please refer to the last page for important disclosures Page 3
June 12, 2017
Financials | Company Research
Fig 4: Largest shareholder for major banks, 2016
Exchange
Code
Company
Largest shareholder
Shareholding (bn
shares)
Shareholding (%)
China
601398 CH
Industrial & Commercial Bank
of China
Central Huijin Investment
123.7
34.7
601288 CH
Agricultural Bank of China
Central Huijin Investment
188.5
64.0
601939 CH
China Construction Bank
Central Huijin Investment
130.0
40.0
601328 CH
Bank of Communications
Central Huijin Investment
142.8
57.1
601988 CH
Bank of China
Finance Ministry of PRC
19.7
26.5
US
BAC US
Bank of America
Blackrock,Inc.
0.7
6.7
JPM US
JP Morgan Chase & Co
The Vanguard Group
0.2
6.7
C US
Citigroup
Blackrock,Inc.
0.2
7.2
WFC US
Wells Fargo & Co
Berkshire Hathaway Inc.
0.5
10.0
GS US
Goldman Sachs
Blackrock,Inc.
0.0
6.1
Hong Kong
5 HK
HSBC Holdings
Blackrock,Inc.
1.1
5.8
2888 HK
Standard Chartered
Dover Investments
0.5
15.8
23 HK
Bank of East Asia
Sumitomo Mitsui Banking Corp
0.5
19.0
11 HK
Hang Seng Bank
HSBC
1.2
62.1
Source: Company data, SWS Research
Rising giant
Looking forward, we expect HSBC to enjoy upcoming fundamental improvements and
enlarging valuation premium.
From the fundamental side, we believe HSBC will be one of the largest beneficiary amid the
rising interest rate curve and stabilizing global economy. We expect it to report a growing
loans book, widening margins with higher interest rates, rising revenue growth, flat costs,
consolidating asset quality, recovering earnings growth, sound ROE, enhancing capital
position, sustaining high dividend and possible share buybacks. This should be attributed to
its asset growth potential with Asian focus and strong funding capability backed by its retail
advantage.
As the systematic risks of global economy have been eliminated, monetary easing of major
developed economic entities slows down. We note signals from central banks in major
developed economies around the world that they are considering a shift towards tighter
monetary policy as macroeconomic conditions signal sustained improvement. The
International Monetary Fund (IMF) forecasts an uptick in global economic growth in 2017
against 2016.
This may negatively impact market sentiment and liquidity, pushing up funding cost in the
interbank market. By raising the funding cost for banks, banks will require higher investment
yields on both loans and bonds. As an example, since November 2016, 10-year Chinese
central government bond and China Development Bank bond yields have rallied c.100bps,
with the central government paper up from 2.64% to 3.35% and the policy bank’s debt up
from 3.01% to 4.12%; meanwhile, AAA-rated corporate bond yields have also rallied from
3.34% to 4.57% and BBB+ bonds have risen from 13.05% to 14.19%.
Please refer to the last page for important disclosures Page 4
June 12, 2017
Financials | Company Research
Fig 5: China bond yields
Source: Companies, SWS Research
We also note an impact in the form of rising loan yields. Rising interbank funding cost and
rising bonds yield will lift banks' required loan yields. At present, lending to businesses
carries a 100% risk weighting in calculations ofbanks’ capital adequacy ratios (CAR); by
contrast mortgage lending carries a 50% risk weighting and 25% income tax, and policy bank
bonds have zero risk weighting. We also highlight that interest income on the
aforementioned assets is subject to a 25% income tax rate, but that yield generated from
central government bond holdings (which carry a zero risk weighting in CAR calculations)
are income tax exempt. As such, rising bond yields will encourage banks to lift rates on
lending to businesses in particular given the higher capital usage for that asset class.
Since the central bank started tightening open market operations rates in 4Q16, the
discount bills rate has rallied, from 2.4% in November 2016 to 4.2% as of March 2017. By
end-3Q16, mortgage rates had declined for eight consecutive quarters to 4.52%, but since
November, rates for borrowers buying their first home picked up to 4.46%. Given similarities
in duration and asset quality, we see rising bond yields as lifting mortgage rates. In 3Q16,
the mortgage rate was 4.5% as compared to a 10-yearpolicy bank bond yield of 3.3%, while
the 10-yearpolicy bank bond yield has rallied to 4.17%, suggesting mortgage rates should
be approximately 5.4%.
0
1
2
3
4
5
6
7
2013-01-04
2013-03-04
2013-05-04
2013-07-04
2013-09-04
2013-11-04
2014-01-04
2014-03-04
2014-05-04
2014-07-04
2014-09-04
2014-11-04
2015-01-04
2015-03-04
2015-05-04
2015-07-04
2015-09-04
2015-11-04
2016-01-04
2016-03-04
2016-05-04
2016-07-04
2016-09-04
2016-11-04
2017-01-04
2017-03-04
10Y Central government bond yield
10Y CDB bond yield
10Y AAA corporate bond yield
%
Please refer to the last page for important disclosures Page 5
June 12, 2017
Financials | Company Research
Fig 6: Rising bond yield in China
Source: Companies, SWS Research
As for the impact on fundamentals in the banking sector, we believe banks may further
differentiate as a result. We favour banks with stronger funding capability on the liability
and equity side, as well as those with larger growth potential and stronger pricing power on
the assets side. As tightening monetary policy lead to a rising interbank rates and in turn
drives up bond and loan yields, banks with stronger funding capability on the liability and
equity side will be less impacted by rising interbank rates, while those with larger growth
potential and pricing power on the asset side will benefit from declining availability of bonds
and alternative investments and rising asset yields.
(1) From the asset side, we believe the Asia focus could give HSBC larger growth potential
due to leading NIM and asset quality in Asia. As the birthplace of HSBC, Asia remains HSBC’s
primary focus and is becoming increasingly important. As of end 2016, Asia – where the firm
has a leading market share – accounted for 38% of the firm’s risk-weighted assets but
contributed 74% of the firm’s pre-tax profits. Its contribution in the firms’ total asset
increased from 24% in 2006 to 38% in 2016, while its contribution in the firms’ unadjusted
profit before tax increased from 39% in 2006 to 194% in 2016.
And we find Asia outperform the other regions in terms of NIM and asset quality. On the
one hand, NIM in Asia remained the third highest at 1.9% among the five regions of HSBC
and it rallied by 8bps in 1Q17 as compared to 4bps increase for the group. Its contribution
in the firms’ net interest income increased from 22% in 2006 to 42% in 2016. On the other
hand, its NPL ratio in Asia remained the lowest at 0.7% among the five regions. Its proportion
in the firms’ non-performing loans only slightly increased from 12% in 2006 to 14% in 2016,
while its proportion in the firms’ provision for loan losses only increased from 7% in 2006 to
20% in 2016.
(2) From the funding side, the proportion of deposits and debts issued in its total liabilities
reached 82% and its CAR reached 20% as of end 2016, both ranking first among its global
peers. This is mainly attributed to its retail advantage. HSBC splits its business into four core
segments: retail banking and wealth management (RBWM) for individuals, commercial
banking (CMB) for enterprises, global banking and markets (GB&M) for the large multi-
national companies who need sophisticated financial products worldwide and wealth
management services for high net worth clients, its “global private banking” segment. This
comprehensive and balanced banking model can provide desirable synergies, reduce
operating expenses, improve profitability, strengthen capital position and ultimately
generate stable return for shareholders. And retail banking is the core of its funding
1
2
3
4
5
6
7
8
9
10
2008-09
2008-12
2009-03
2009-06
2009-09
2009-12
2010-03
2010-06
2010-09
2010-12
2011-03
2011-06
2011-09
2011-12
2012-03
2012-06
2012-09
2012-12
2013-03
2013-06
2013-09
2013-12
2014-03
2014-06
2014-09
2014-12
2015-03
2015-06
2015-09
2015-12
2016-03
2016-06
2016-09
2016-12
Weighted average lending rate
Enterprise loans
Bills discount
Home mortgage
%
Please refer to the last page for important disclosures Page 6
June 12, 2017
Financials | Company Research
capability and provides solid deposit foundation for other segments’ development. The
RBWM business primarily targets at middle class clients and higher net-worth individuals,
servicing 36m individuals worldwide. It offers them multi-level financial products and
services, including retail banking services and wealth management services, as well as
investment management and insurance products. The proportion of RBWM in the firms’
total deposits increased from 43% in 2006 to 46% in 2016, while its proportion in the firms’
total assets remained low at 17% since 2011. So the RBWM business makes up a significant
proportion of the firm’s the deposits, but it is an effective way to control its asset expansion
and enhance capital position. Thanks to its high NIM, RBWM contributed 47% of net interest
income and 27% of profit in 2016.
From the valuation side, we expect its strong capital position would lead to an enlarging
valuation premium amid strengthening monetary policy and industry regulation. HSBC has
always been a bank with strong liquidity and capital. As of end 1Q17, common equity tier 1
ratio rose to as high as 14.3%, much stronger as compared to peers. In a normal quarter,
HSBC is trend to generate about 15 to 20 bps to common equity tier 1 capital and the target
of Common equity tier 1 capital is 12~13%. Now the company’s capital position has already
reached its desired level as of end 2019. Backed by strong surplus capital of USD10bn, HSBC
started to do share buybacks in addition to 51cents of dividend. So far, HSBC have bought
back USD3.5bn of shares during 4Q16-1Q17 and HSBC may do more share buybacks in the
future. But if the share price goes up, HSBC may consider special dividend instead of shares
buyback.
And HSBC has always been generous in dividend payout. It paid four quarterly dividend, 10,
10, 10 and 21 US cents. It aims to maintain dividend at that level for the foreseeable future.
It's represents more than 6% of dividend yield and it is very attractive to income funds, like
insurance companies with focus on high yield, good liquidity and possible business synergies.
Fig 7: Late 2016, south-bound capital inflow start to ramp up
Source: SWS Research
Please refer to the last page for important disclosures Page 7
June 12, 2017
Financials | Company Research
Fig 8: In general, quota usage of southbound is higher than northbound
Source:SWS Research
Fig 9: 60% of southbound capital flow into Banking sector
Source: MOF, SWS Research
Please refer to the last page for important disclosures Page 8
June 12, 2017
Financials | Company Research
Fig 10: CCB, HSBC and ICBC are top picks for southbound capital
Source: SWS Research
Asia remains the primary focus
From the asset side, we believe the Asia focus could give HSBC larger growth potential due
to leading NIM and asset quality in Asia. Backed by its extensive global coverage, HSBC will
be one of the major beneficiaries of economic and financial internationalisation. We expect
global traffic of commodities, services and finance to grow from US$28tn in 2012 to
US$85tn in 2025. As of 2016, HSBC covered 15 global trade corridors, accounting for 50%
of global trade volume.
Fig 11: Largest trade corridors HSBC covered
Source: Wind, SWS Research
Bank,
0.0%
CCB, 36.5%
HSBC, 22.3%
ICBC, 19.1%
BOC, 7.7%
CMB,
4.7%
ABC, 4.1%
CITIC, 3.6%
BOCOM, 0.9%
CMBC, 0.8%
CEB, 0.5% BOCHK, 0.2%
Please refer to the last page for important disclosures Page 9
June 12, 2017
Financials | Company Research
Fig 12: Population growth rate
Source: Wind, SWS Research
Fig 13: Estimated percentage of middle class population
Source: Wind, SWS Research
Please refer to the last page for important disclosures Page 10
June 12, 2017
Financials | Company Research
Fig 14: Percentage of aging population
Source: SWS Research
In terms of its global positioning, as of end-2016, Asia – where the firm has a leading market
share – accounted for 38% of the firm’s risk-weighted assets but contributed 74% of the
firm’s pre-tax profits; Europe accounted for 34% of assets, but just 8% of 2016 profit and
North America accounted for 17% of assets and 7% of profit. The company’s Middle East
and Africa segment held 7% of the firm’s risk-weighted assets, while Latin America
accounted for 4%, while the Middle East and Africa contributed 8% of HSBC’s pre-tax profit
and Latin America contributed 3%.
Figure 1：Employees of HSBC spread all over the world
Source: Company data; SWS Research
Figure 2：Asian clients’ loans increased to 50% in 2016(US$ bn)
Please refer to the last page for important disclosures Page 11
June 12, 2017
Financials | Company Research
Source: Company data; SWS Research
Figure 3：70% of risk weighted assets located in Asia and EU(US$ bn)
Source: Company data; SWS Research
Figure 4：Profit from Asia region account for 74% of adjusted profit before tax(US$ bn)
Source: Company data; SWS Research
Asia remains the primary focus
Please refer to the last page for important disclosures Page 12
June 12, 2017
Financials | Company Research
As the birthplace of HSBC, Asia remains HSBC’s primary focus and is becoming increasingly
important. Its contribution to the firms’ overall asset base increased from 24% in 2006 to
38% in 2016, while its contribution to the firms’ unadjusted profit before tax increased from
39% in 2006 to 194% in 2016.
Fig 15: Asia becomes increasingly important in terms of total assets
Source: SWS Research
Fig 16: Asia becomes increasingly important in terms of profit before tax
Source: SWS Research
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Asia Europe North America MENA Latin America
-40%
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Asia Europe North America MENA Latin America
Please refer to the last page for important disclosures Page 13
June 12, 2017
Financials | Company Research
We believe the major reason behind the increasing importance of Asia is the rise in net
interest margin (NIM) in the region as well as improvements in asset quality amid stabilizing
macroeconomic conditions. NIM in the firm’s Asia region was 1.9%, third among the five
regions but rallied 8bps in 1Q17 as compared to a 4bps increase for the group as a whole.
Its contribution to the lender’s overall net interest income increased from 22% in 2006 to
42% in 2016.
Fig 17: NIM breakdown by regions
NIM
2008
2009
2010
2011
2012
2013
2014
2015
2016
Asia
3.0%
2.7%
2.0%
2.1%
2.2%
2.2%
2.2%
2.0%
1.9%
Europe
1.3%
1.8%
1.6%
1.5%
1.4%
1.3%
1.3%
1.3%
1.2%
North
America
5.0%
5.3%
4.5%
3.9%
3.0%
2.3%
1.8%
1.7%
1.5%
MENA
5.6%
4.7%
4.3%
4.2%
4.2%
3.8%
3.8%
4.5%
Latin
America
12.0%
8.8%
8.1%
8.2%
9.6%
9.4%
7.2%
7.4%
10.3%
Total
2.9%
3.0%
2.7%
2.5%
2.3%
2.1%
1.9%
1.9%
1.7%
Source: Company Announcement, SWS Research
Fig 18: Net interest income breakdown by regions
Source: Company Announcement, SWS Research
Meanwhile, HSBC’s non-performing loan (NPL) ratio in its Asian business remained the
lowest among its regions, at 0.7%. Asia accounted for 14% of the firm’s overall non-
performing loans in 2016, up only mildly compared with 12% in 2006, while its contribution
to firm-wide provisions for loan losses increased from 7% in 2006 to 20% in 2016.
Fig 19:Non-performing loans ratio breakdown by regions
NPL ratio
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Asia
1.0%
0.8%
0.8%
0.5%
0.5%
0.6%
0.7%
0.7%
Europe
1.5%
1.4%
2.6%
2.4%
2.6%
2.5%
2.6%
2.4%
North America
1.7%
2.8%
13.9%
13.9%
9.1%
8.8%
7.0%
4.3%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Asia Europe North America MENA Latin America
Please refer to the last page for important disclosures Page 14
June 12, 2017
Financials | Company Research
MENA
9.6%
8.2%
7.9%
6.5%
7.7%
6.9%
Latin America
4.0%
4.3%
5.2%
5.7%
9.1%
7.4%
7.3%
3.4%
Total
1.6%
1.8%
4.8%
3.8%
3.3%
3.0%
2.7%
2.1%
Source: Company Announcement, SWS Research
Fig 20:Non-performing loans breakdown by regions
Source: Company Announcement, SWS Research
Fig 21: Provision for loans losses by regions
Source: Company Announcement, SWS Research
Within the Asia segment, HK, Mainland China and Singapore are the key countries,
accounting for 27%, 4% and 3% of the firm’s total loans, 36%, 4% and 3% of the firm’s total
deposits, while contributing 113%, 37% and 6% of the firm’s total profit before tax.
We believe the major reason behind the increasing importance of Hong Kong and mainland
China to the firm’s business is the stablising macroeconomic conditions and prospects of a
rising interest rate curve. As yet, the Hong Kong dollar peg to the US dollar is intact, yet if
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Asia Europe North America MENA Latin America
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Asia Europe North America MENA Latin America
Please refer to the last page for important disclosures Page 15
June 12, 2017
Financials | Company Research
US rates continue to rise we see significant pressure on the Hong Kong dollar and we see a
significant chance of the territory’s currency being forced higher later this year. In China, in
response to rising consumer and producer price inflation as well as climbing housing prices
and depreciation pressure on the domestic currency, the central bank has shifted to a
tightening bias since 4Q16, offering higher rates on paper auctioned as part of its regular
open market operations and tightening its loan quota to banks. The previous time that the
PBoC lifted rates on its open market operations instruments was from July 2013 to early
2014, at a time of strengthening shadow banking regulation amid a period of financial
deleveraging. Since early 2015, its reverse repos rates started to decline as the central bank
sought to loosen monetary policy to stabilise the real economy. From October 2015 to
January 2017, reverse repos rates have been steady, indicating a relative neutral monetary
policy. Since then, with deleveraging featuring more prominently in policymaker statements
and rising inflation pressure, we see monetary policy tightening.
Rising funding costs in the interbank market due to higher rates on the central bank’s open
market operations tools force commercial banks to seek higher investment yields on both
loans and bonds. Historical experience also indicates that loans yield may rise after the
central bank raises its reverse repo rates even without a base rate hike. In 2013-14, when
the PBoC lifted rates of its 7-day reverse repos by 75bps, the yield on loans to businesses
increased 20 bps over the same period, while mortgage yields rose 40bps and discount bills
rates increased by 40bps.
Since the central bank started tightening open market operations rates in 4Q16, the bills
discount rate has rallied, from 2.4% in November 2016 to 4.2% as of March 2017. By end-
3Q16, mortgage rates had declined for eight consecutive quarters to 4.52%, but since
November, rates for borrowers buying their first home picked up to 4.46%. Given similarities
in duration and asset quality, we see rising bond yields as lifting mortgage rates. In 3Q16,
the mortgage rate was 4.5% as compared to a 10-year policy bank bond yield of 3.3%, while
the 10-year policy bank bond yield has rallied to 4.17%, suggesting mortgage rates should
be approximately 5.4%.
Fig 22: Asia segment breakdown by countries
Total loans
Proportion
Total deposits
Proportion
Profit before tax
Proportion
Asia
367,066
42.22%
631,723
49.65%
13,779
193.74%
HK
231,264
26.60%
461,626
36.28%
8,069
113.46%
Australia
19,859
2.28%
18,030
1.42%
369
5.19%
India
8,687
1.00%
11,289
0.89%
743
10.45%
Indonesia
4,946
0.57%
5,092
0.40%
178
2.50%
Mainland
China
33,538
3.86%
46,576
3.66%
2,607
36.66%
Malaysia
11,656
1.34%
12,904
1.01%
355
4.99%
Singapore
25,448
2.93%
39,062
3.07%
439
6.17%
Taiwan
9,836
1.13%
11,731
0.92%
148
2.08%
Others
21,832
2.51%
25,413
2.00%
871
12.25%
Source: SWS Research
Please refer to the last page for important disclosures Page 16
June 12, 2017
Financials | Company Research
Fig 23: GDP growth of key countries in Asia segment
Source: SWS Research
Fig 24: Interest rate curve(10Y treasury bond) of key countries in Asia segment
Source: SWS Research
The stabilising economy and rising interest rate curve will lead to a NIM enhancement and
asset quality improvement. As a result, we believe China will become increasingly important
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
2006-03
2006-08
2007-01
2007-06
2007-11
2008-04
2008-09
2009-02
2009-07
2009-12
2010-05
2010-10
2011-03
2011-08
2012-01
2012-06
2012-11
2013-04
2013-09
2014-02
2014-07
2014-12
2015-05
2015-10
2016-03
2016-08
HK
India
Mainland China
Singapore
%
0
2
4
6
8
2002-01-04
2003-01-04
2004-01-04
2005-01-04
2006-01-04
2007-01-04
2008-01-04
2009-01-04
2010-01-04
2011-01-04
2012-01-04
2013-01-04
2014-01-04
2015-01-04
2016-01-04
2017-01-04
China
Australia
Singapore
%
Please refer to the last page for important disclosures Page 17
June 12, 2017
Financials | Company Research
for HSBC. As a Hong Kong-based bank, HSBC is able to better secure permission to open new
branches and launch new products in China compared with overseas banks, which face
more restrictions under current regulations. The bank now has a US$40bn loan book in
China and books US$1bn in pre-tax profit in the country, representing a 0.2% market share.
HSBC targets US$5bn profit before tax in its China business.
At present, HSBC is focused on China’s four tier-1 cities: Shanghai, Shenzhen, Guangzhou
and Beijing. It provides personal loans and wealth management for retail clients, and
provides commercial banking services to 1,000 corporate customers with business
connections to Hong Kong. Looking forward, we believe HSBC will aim to grow aggressively
in the Pearl River Delta, home to a range of high-tech, research and digital industries.
In terms of its credit card business, HSBC has allied with local bank Bank of Communication
(3328:HK – BUY) to issue “Pacific cards”, which number 45m to date, and develop China
market customer credit scoring and profiling as well as marketing capabilities. In future,
HSBC will monetise these experiences by launching its own cards. We note that the volume
of credit cards issuance in the Pearl River Delta since December 2016 has performed better
than expected, at c.200,000 at present.
HSBC is the first choice for offshore renminbi business, and has achieved 3% YoY growth. In
future, HSBC will reinforce its leading position in the internationalisation of the renminbi.
In terms of non-bank financial services, HSBC entered the Chinese securities market in 2015,
acquiring a majority stake in a locally licensed securities company.
Europe
Europe accounted for 34% of the firm’s risk-weighted assets, but just 8% of its 2016 profit.
Within the European segment, the UK, France and Germany are the key markets, accounting
for 31%, 5% and 1% of the firm’s total loans, while contributing -55%, 8% and 4% of the
firm’s total profit before tax.
Most of the company’s European business is conducted in the UK. Following the referendum
in which the UK voted to leave the EU (“Brexit”), the country recorded a sharp depreciation
in sterling and a decline in economic outlook. The Bank of England unveiled a series of
stimulus policies, lowering the base rate by 25bpts to 0.25%, starting a new long-term
financing plan, promoting interest rate cuts to benefit the real economy; purchasing a
further £10bn in corporate bonds and £60bn in government bonds, raising its asset
purchase plan to £435bn. At present, the UK economy is performing strongly, although we
note some inflation pressure because of the weak pound. However, the weak currency is a
boon for the country’s exports and manufacturing industries. Retail banking is also
improving, particularly mortgage lending. HSBC enjoys a 30-40% market share of internation
banking in UK.
The company’s business is split into two components, one of which is the regulatory
required “ring-fenced” bank. After the 2008 financial crisis, UK regulators ordered major
banks to hold all domestic deposits in a separate bank to protect domestic taxpayers from
footing the bill for future banking risks. The restriction on using deposits outside of the bank
has resulted in double-digit ROE and solid asset quality, with most lending to residential
mortgages at a low loans to value ratio (c.40%) and reasonable quality corporate and
personal lending. The company’s other business in the UK is its global banking and markets
business. If Brexit turns out to be bad for the UK economy, this business may experience
slower revenue growth and higher bad debt. However, given the ease with which HSBC can
move people from London to Paris, we see limited potential fall-out from such a scenario
for the bank.
Please refer to the last page for important disclosures Page 18
June 12, 2017
Financials | Company Research
We believe HSBC’s weak UK market performance in 2016 can be attributed to one-off items,
including a US$1.5bn in accounting credits written down and an accounting change in the
fair value of debt.
In the Eurozone, the bank’s business is approximately three quarters conducted in France
and a quarter in Germany. In the European Union (EU), the European Central Bank (ECB)
continues to extend its quantitative easing programme. However, the lack of unified
economic policy among the various European member countries as well as high social
welfare costs, relatively high minimum wages and favourable labour laws for employees
have suppressed economic growth despite negative deposit rates, with consumer inflation
remaining extremely low. As such, European monetary policy makers have switched to
lower interest rates.
Outside the EU, HSBC offers private banking services in Switzerland. The firm also decided
to keep and reorganise its Turkey business, including keeping its corporate banking business
and renewing its retail bank network development plan.
Fig 25: Europe segment breakdown by countries
Total loans
Proportion
Total deposits
Proportion
Profit before tax
Proportion
Europe
339,449
39.05%
446,615
35.10%
-6,774
-95.25%
UK
265,690
30.56%
361,278
28.39%
-3,913
-55.02%
France
43,835
5.04%
35,996
2.83%
590
8.30%
Germany
8,928
1.03%
13,925
1.09%
253
3.56%
Switzerland
8,227
0.95%
9,474
0.74%
-491
-6.90%
Others
12,769
1.47%
25,942
2.04%
-3,213
-45.18%
Source: SWS Research
Fig 26: GDP growth of key countries in Europe segment
Source: SWS Research
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
1979-03
1980-06
1981-09
1983-01
1984-04
1985-07
1986-10
1988-01
1989-04
1990-07
1991-10
1993-01
1994-04
1995-07
1996-10
1998-01
1999-04
2000-07
2001-10
2003-01
2004-04
2005-07
2006-10
2008-01
2009-04
2010-07
2011-10
2013-01
2014-04
2015-07
2016-10
UK
France
Germany
Switzerland
%
Please refer to the last page for important disclosures Page 19
June 12, 2017
Financials | Company Research
Fig 27: Interest rate curve(10Y treasury bond) of key countries in Europe segment
Source: SWS Research
North America
North America accounted for 17% of HSBC’s risk-weighted assets and 7% of its pre-tax profit.
Within the North America segment, the US and Canada are the key countries, accounting
for 9% and 4% of the firm’s total loans respectively, while contributing -7% and 8% of the
firm’s total profit before tax.
The US Federal Reserve restarted its interest rate hike cycle in December 2015 and raised
its US short-term economic growth outlook and inflation expectations. For 2017, the Fed
guided three rate hikes over the course of the year.
HSBC’s stated target for its US operations is to record a US$2bn profit per year. As of the
moment, as annualised profit is approximately Rmb1bn, HSBC has to double its US profits
by boosting its balance sheet and revenue growth.
Fig 28: North America segment breakdown by countries
Total loans
Proportion
Total deposits
Proportion
Profit before tax
Proportion
North
America
112,983
13.00%
138,790
10.91%
185
2.60%
US
75,466
8.68%
88,751
6.98%
-471
-6.62%
Canada
35,152
4.04%
42,096
3.31%
540
7.59%
Others
2,365
0.27%
7,943
0.62%
116
1.63%
Source: SWS Research
-1
0
1
2
3
4
5
6
2008-01-02
2008-07-02
2009-01-02
2009-07-02
2010-01-02
2010-07-02
2011-01-02
2011-07-02
2012-01-02
2012-07-02
2013-01-02
2013-07-02
2014-01-02
2014-07-02
2015-01-02
2015-07-02
2016-01-02
2016-07-02
2017-01-02
UK
France
Germany
%
Please refer to the last page for important disclosures Page 20
June 12, 2017
Financials | Company Research
Fig 29: GDP growth of key countries in North America segment
Source: SWS Research
Fig 30: Interest rate curve(10Y treasury bond) of key countries in North America segment
Source: SWS Research
Middle East and North Africa
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
1962-03
1964-08
1967-01
1969-06
1971-11
1974-04
1976-09
1979-02
1981-07
1984-01
1986-06
1988-11
1991-04
1993-09
1996-02
1998-07
2001-01
2003-06
2005-11
2008-04
2010-09
2013-02
2015-07
US
Canada
%
0.00
1.50
3.00
4.50
2008-01-01
2008-07-01
2009-01-01
2009-07-01
2010-01-01
2010-07-01
2011-01-01
2011-07-01
2012-01-01
2012-07-01
2013-01-01
2013-07-01
2014-01-01
2014-07-01
2015-01-01
2015-07-01
2016-01-01
2016-07-01
2017-01-01
US
Canada
Please refer to the last page for important disclosures Page 21
June 12, 2017
Financials | Company Research
The company’s Middle East and North Africa segment held 7% of the firm’s risk-weighted
assets and contributed 8% of HSBC’s pre-tax profit. Within the Middle East and North Africa
segment, the United Arab Emirates (UAE) and Egypt are the key countries, accounting for
2% and 0.2% of the firm’s total loans, while contributing 7% and 6% of the firm’s total profit
before tax.
The Middle East and North Africa region basically consists of three countries for HSBC, in
which areas HSBC has a long history and good government relationships. The company has
a big bank in Egypt with 100 branches, giving it a large deposits base. HSBC’s clients in Egypt
are big international companies. HSBC also invests in government bonds, which offer
relatively good yield and credit quality. After Egypt, the company’s operations are found in
the UAE and Saudi Arabia. The company’s loan impairment charges for the region are not
particularly high but still higher than other countries because of the limited extent of
development of the countries in the region. In UAE, we note some impairment charges after
the local economy deteriorated. An additional concern peculiar to the region, heavily reliant
on imported skills and labour, is “skip risk”, the risk that non-locals lose their jobs and are
thus deported, often leaving their debts behind. However, we see overall risk exposure in
the region as well under control.
Fig 31: Middle East and North Africa segment breakdown by countries
Total loans
Proportion
Total deposits
Proportion
Profit before tax
Proportion
Middle East
and North Africa
32,431
3.73%
34,766
2.73%
1,503
21.13%
Egypt
1,672
0.19%
3,790
0.30%
454
6.38%
Turkey
4,316
0.50%
4,122
0.32%
0.00%
UAE
18,768
2.16%
16,532
1.30%
480
6.75%
Others
7,675
0.88%
10,322
0.81%
569
8.00%
Source: SWS Research
Fig 32: Interest rate curve(10Y treasury bond) of key countries in MENA segment
Source: SWS Research
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2012-02-06
2012-05-06
2012-08-06
2012-11-06
2013-02-06
2013-05-06
2013-08-06
2013-11-06
2014-02-06
2014-05-06
2014-08-06
2014-11-06
2015-02-06
2015-05-06
2015-08-06
2015-11-06
2016-02-06
2016-05-06
2016-08-06
2016-11-06
2017-02-06
2017-05-06
Turkey
%
Please refer to the last page for important disclosures Page 22
June 12, 2017
Financials | Company Research
Latin America
Latin America accounted for 4% of the company’s risk-weighted assets and contributed 3%
of HSBC’s pre-tax profit in 2016. Within the Latin America segment, Mexico is the key
country, accounting for 2%of the firm’s total loans, while contributing 3%of the firm’s total
profit before tax.
Mexico is one of HSBC’s target markets for development. HSBC is one of the five largest
banks by asset size active in Mexico, enjoying a 15-16% share of the local commercial
banking market and 10% of the retail banking market. For Mexico, the company’s stated
target is to make US$600m in annual profit before tax, a target which the firm is well on the
way toward achieving.
In the past 7-8 years, HSBC cut its countries exposure from 84 to 70, exiting a number of
markets and business lines carrying economic risk, financial crime risk and regulatory risk.
In particular, we highlight the firm’s exit from the Brazil market in 2016, as it controlled only
a 2.5% market share and could not compete with the big local players. HSBC sold its Brazil
business for 1.10x book value, at US$5bn. However, the firm retains c.300 large corporate
clients there, so it opened a small office of 300 staff for its global banking and markets
operations.
Fig 33: Latin America segment breakdown by countries
Total loans
Proportion
Total deposits
Proportion
Profit before tax
Proportion
Latin
America
17,425
2.00%
20,492
1.61%
-1,581
-22.23%
Mexico
13,298
1.53%
14,423
1.13%
247
3.47%
Others
4,127
0.47%
6,069
0.48%
-1,828
-25.70%
Total
869,354
100.00%
1,272,386
100.00%
7,112
100.00%
Source: SWS Research
Fig 34: GDP growth and interest rate curve of key countries in Latin America segment
Source: SWS Research
-10
-5
0
5
10
15
2003-05-16
2004-05-16
2005-05-16
2006-05-16
2007-05-16
2008-05-16
2009-05-16
2010-05-16
2011-05-16
2012-05-16
2013-05-16
2014-05-16
2015-05-16
2016-05-16
2017-05-16
GDP growth
Treasury bond yield
%
Please refer to the last page for important disclosures Page 23
June 12, 2017
Financials | Company Research
Income sources
From the funding side, the proportion of deposits and debts issued in its total liabilities
reached 82% and its CAR reached 20% as of end 2016, both ranking first among its global
peers. This is mainly attributed to its retail advantage.
HSBC splits its business into four core segments: retail banking and wealth management
(RBWM) for individuals, commercial banking (CMB) for enterprises, global banking and
markets (GB&M) for the large multi-national companies who need sophisticated financial
products worldwide and wealth management services for high net worth clients, its “global
private banking” segment. This comprehensive and balanced banking model can provide
desirable synergies, reduce operating expenses, improve profitability, strengthen capital
position and ultimately generate stable return for shareholders.
In terms of the breakdown of assets by the different businesses, the GB&M segment
accounted for 35% of the firm’s risk-weighted assets as of end-2016 (29% of profit before
tax) while its commercial banking business accounted for 32% of assets and 32% of profit.
Its retail banking business contributed 13% of assets but 27% of profit, and the private
banking segment accounted for 2% of assets and profit.
Retail banking is the core of its funding capability and provides solid deposit foundation for
other segments’ development.
Figure 5：GB&M, CMB and RBWM are three pillars in terms of risk weighted assets
Source: Company data; SWS Research
Figure 6：2016 RBWM business contributes 38% of total revenue
Source: Company data; SWS Research
Please refer to the last page for important disclosures Page 24
June 12, 2017
Financials | Company Research
Figure 7：CMB, GB&M and RBWM contribute 30% of profit before tax on average
Source: Company data; SWS Research
Retail banking and wealth management
Retail banking and wealth management business mainly targets individuals and households.
It is the core of HSBC’s funding capability and provides the solid foundation of deposits
underpinning development in other segments. The RBWM business primarily targets middle
class clients and higher net-worth individuals, servicing 36m individuals worldwide. It offers
them multi-level financial products and services, including retail banking services and wealth
management services, as well as investment management and insurance products.
RBWM deposits as a proportion of the firms’ overall deposits increased from 43% in 2006
to 46% in 2016, while the proportion of RBWM assets in the firms’ total assets have
remained low, at 17%, since 2011. As such, we see the RBWM business as making up a
significant proportion of the firm’s deposits, but an effective way to control its asset
expansion and enhance capital position. Thanks to its high NIM, the RBWM segment
contributed 47% of net interest income and 27% of the company’s pre-tax profit in 2016.
The RBWM business branch network not only meets the needs of both CMB clients and
global business clients, it also enhances the visibility of the HSBC brand. In 2015, the
segment’s sales of insurance products brought in revenue of US$1.7bn while investment
management services to global business clients generated US$1.1bn. RBWM clients enjoy
foreign currency and wealth management products and services through the GB&M
segment.
RBWM
5.3
27%
CMB
6.1
32%
GB&M
5.6
29%
GPB
0.3
2%
Business center
2
10%
2016
Please refer to the last page for important disclosures Page 25
June 12, 2017
Financials | Company Research
Fig 35: RBWM is the major source of deposits
Source: SWS Research
Fig 36: NIM breakdown by business segments
NIM
2008
2009
2010
2011
2012
2013
2014
2015
2016
Commercial banking
5.9%
5.4%
4.8%
4.7%
4.7%
4.5%
4.2%
3.8%
4.0%
Global Banking &
Markets
0.9%
0.9%
0.7%
0.6%
0.6%
0.5%
0.6%
0.6%
0.7%
Retail Banking &
Wealth
Management
9.9%
7.7%
7.6%
7.0%
6.3%
5.7%
5.0%
4.7%
4.6%
Private Banking
2.1%
2.2%
1.9%
1.9%
1.8%
1.9%
1.7%
1.5%
2.7%
Others
4.2%
1.7%
1.3%
-0.5%
0.5%
0.5%
0.5%
1.2%
0.2%
Total
2.9%
2.9%
2.7%
2.7%
2.3%
2.1%
1.9%
1.9%
1.7%
Source: Company Announcement, SWS Research
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014 2015 2016
Commercial banking Global Banking & Markets
Retail Banking & Wealth Management Private Banking
Others
Please refer to the last page for important disclosures Page 26
June 12, 2017
Financials | Company Research
Fig 37: Net interest income breakdown by business segments
Source: Company Announcement, SWS Research
Fig 38: Provision for loans losses breakdown by business segments
Source: Company Announcement, SWS Research
Commercial banking
The bank’s commercial banking business mainly targets enterprises with yearly turnover of
below US$50m. HSBC operates its commercial business in 54 countries worldwide, serving
nearly 2m enterprises and covering 90% of global trade and cash flow, servicing companies
from small local-focused start-ups to large multinational corporations. Products offered
range from short-term working capital loans to long-term credit, bankers’ acceptances,
international trade financing and mergers and acquisitions among other financial services.
The firm generated nearly US$6bn in income from synergies in 2015 from providing trade
financing, working capital and liquidity management solutions to customers of global
banking and capital markets. The business also utilises the broader group's equity financing,
insurance and investment management team to serve customers.
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Commercial banking Global Banking & Markets
Retail Banking & Wealth Management Private Banking
Others
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Commercial banking Global Banking & Markets
Retail Banking & Wealth Management Private Banking
Others
Please refer to the last page for important disclosures Page 27
June 12, 2017
Financials | Company Research
Fig 39: CMB accounts for the largest part of HSBC’s profit before tax
Source: SWS Research
Global banking and markets
HSBC’s global banking and markets business mainly targets major governments and large
multinational corporations with yearly turnover of above US$50m. HSBC’s GB&M business
is active in 50 countries worldwide, serving nearly 4,100 customers, including major
governments and large multinational corporations. From a geographical standpoint, the
firm is focused primarily on developing regions exhibiting the greatest growth potential,
specifically member states to the North American Free Trade Agreement (NAFTA) and
Association of South East Asian Nations (ASEAN) countries, as well as its China business
centred on the Pearl River Delta. Its clients are typically governmental or corporate and the
firm offers tailored comprehensive financial services packages, from trading, financing,
consulting, hedging, capital market instruments to risk management.
Within the GB&M segment, 80% of total revenue comes from market revenue, including
trading income from foreign exchange, credits and equities as well as liquidity and cash
management. The remaining 20% of the segment’s revenue comes from interest income,
as most of the large multinational corporations have stronger pricing power and lower NIM
as compared to SMEs.
In 2015, revenue from GB&M synergies reached US$8.4bn. Specifically, HSBC can service
its CMB and RWBM clients with capital market products, service CMB clients with financing
products, and service GB&M clients with investment management and CMB products.
-40%
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Commercial banking Global Banking & Markets
Retail Banking & Wealth Management Private Banking
Others
Please refer to the last page for important disclosures Page 28
June 12, 2017
Financials | Company Research
Fig 40: GB&M accounts for the largest part of HSBC’s total assets
Source: SWS Research
Global private banking
Global private banking business mainly targets high net-worth individuals. HSBC’s GPB
business provides services such as investment management (consulting, agency and
brokerage services), wealth management planning in order to protect and inherit wealth
(including trust and estate planning), as well as a comprehensive private banking services.
The segment can be divided into three main product areas: enterprise customer groups, to
mine areas of crossover between the GPM business and the company’s CMB and GB&M
segments for synergies; wealth client groups, aimed at exploring synergy between RBWM
and GPB businesses; and the global solutions group, to provide non-traditional wealth
management solutions.
Corporate centre
During 2016, HSBC established the Corporate Centre, to reflect the way it manages its
businesses. The Corporate Centre comprises central treasury (including balance sheet
management), legacy businesses, interests in associates and joint ventures, as well as
central stewardship costs. The Corporate Centre business unit is where the company locates
head office costs and treasury, which manages the income on surplus deposits.
Ongoing reforms
HSBC announced a series of reforms in June 2015 aimed at increasing efficiency. Targets for
2017 include recording an increase in shareholder equity at the group level of 10%-plus. The
company aims to see earnings growth bottom out in 2017 and accelerate in 2018, while
calling for a sustained high dividend payout ratio.
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Commercial banking Global Banking & Markets
Retail Banking & Wealth Management Private Banking
Others
Please refer to the last page for important disclosures Page 29
June 12, 2017
Financials | Company Research
Fig 41: Business development plan is clear
Strategic actions
Targeted outcome by 2017
progress in 2016
Key performance
indicator
Actions to resize and simplify the Group
Reduce Group risk-
weighted assets
(‘RWAs’)by circa $290bn
––Group RWA reduction $290bn
––Return GB&M to Group target
profitability; <1/3 of Group RWAs
––Further reduction of $143.2bn in
2016, notably in GB&M
––GB&M RWAs of $300.4bn, 37% of
the Group total
––RWA reduction from
management actions:
circa $267bn (circa 97%
of 2015–17 target on a
constant currency basis)
Optimize global network
––Reduced footprint
––Completed sale of Brazil operations
on 1 July 2016; maintained a Brazil
presence to serve large corporate
clients’ international needs
––Present in 70 countries
and territories at end of
2016 (down from 73 at
end of 2014)
Rebuild NAFTA region
profitability
––US profit before tax circa $2bn
––Mexico profit before tax circa
$0.6bn
––Successfully achieved a non-
objection to our US capital plan, which
includes a dividend payment to HSBC
Holdings plc in 2017, as part of the
Comprehensive Capital Analysis and
Review (‘CCAR’)
––Mexico market share gains across
key RBWM lending products
––US (excluding CML run-
off portfolio) adjusted
profit before tax: $0.4bn
(down 22% on 2015)
––Mexico adjusted profit
before tax: $0.3bn (up
354% on 2015)
Set up UK ringfenced
bank
––Completed by 2018
––Appointed Chair and CEO of HSBC
UK; other senior appointments in
progress
––Migration of key roles underway
with circa 35% of Birmingham positions
filled
––Implementation in
progress
Deliver $4.5-5.0bn of cost
savings
––2017 exit rate to equal 2014
operating expenses
––$2.2bn cost savings realised in 2016
––Positive jaws in 2016 compared with
2015
––FTE reduction of circa 900 in 2016
––Adjusted costs
(excluding Brazil) down
4% on 2015
Actions to redeploy capital and invest
Deliver growth above
GDP from international
network
––Revenue growth of
international network above GDP
––GLCM revenue up 6% on 2015 driven
by growth in deposits and the effect of
US rate rises
––Global Trade and Receivables
Finance (‘GTRF’) revenue down 7% on
2015, reflecting a decline in market
conditions
––Transaction banking
revenue: $14.7bn (up 2%
on 2015)
––Revenue synergies:
$10.5bn (down 5% on
2015)
Investments in Asia –
prioritize and accelerate
––Market share gains
––Circa 10% growth per annum
in assets under management in
Asia
––Awarded Asia’s ‘Best Investment
Bank’ and Asia’s ‘Best Bank for
Financing’ by Euromoney Awards for
Excellence 2016
––Launched digital banking platform
(HSBCnet) for SMEs in Guangdong
allowing faster payment services with
Hong Kong
––Growing business around China’s
Belt and Road initiative, including
energy sector deals linking China to
Malaysia and Egypt
––Guangdong loans:
$4.7bn (up 16% on 2015)
––ASEAN adjusted
revenue: $3.1bn (down
2% on 2015)
––Asset Management
assets under
management distributed
in Asia: $143bn (up 11%
on 2015)
––Insurance
manufacturing
annualized new business
premiums in Asia: $2.3bn
(up 13% on 2015)
Please refer to the last page for important disclosures Page 30
June 12, 2017
Financials | Company Research
Grow business from
renminbi (‘RMB’)
internationalization
––$2.0–2.5bn revenue
––52% RQFII custodian market share
(in Securities Services); ranked first by
market share in all active RQFII markets
––Joint lead manager for China’s
Ministry of Finance RMB3bn bond in
the UK, the first sovereign RMB bond
issued outside China
––RMB
internationalisation
revenue, from offshore
business partly or wholly
denominated in RMB as
well as selected products
in mainland China:
$1.25bn (down 25% on
2015)
Source: Company data, SWS Research
Earnings forecast
We believe HSBC is positioned to benefit from favourable conditions in 2017. Given HSBC’s
leading market position and recovering financing demand from the stabilising global
economy, we forecast its asset growth to recover. HSBC’s net interest margin have roughly
halved form about 3.2% to about 1.6% over the last 10 years, due to the falling interest rates.
If rate begins to rise, it would be helpful to HSBC. Our analysis shows if interest rates goes
up by 60bps a year, HSBC will make USD1.7bn extra revenue, representing 10% more PBT.
Actually net interest margin in 1Q17 has rised by 4bps, which is the first quarter HSBC has a
NIM increase since 2006. Given its prudent asset portfolio after de-risking its loans book,
we believe its asset quality is stabilising given the recovering global economy. Therefore we
expect HSBC to report a growing loans book, widening margins with higher interest rates,
rising revenue growth, flat costs, consolidating asset quality, recovering earnings growth,
sound ROE, enhancing capital position, sustaining high dividend and possible share
buybacks when appropriate.
Following the company’s write-off of US$3.3bn in goodwill in its GPB segment in 2016, costs
to achieve savings of US$3.1bn and adverse movement in fair value of US$1.8bn, HSBC
reported profit before tax of US$7.1bn in 2016, down from US$18.9bn in 2015. However,
we note that on an adjusted basis, profit before tax came to US$19.3bn in 2016. Moreover,
we highlight HSBC’s steadily improving capital position, as its core tier-1 CAR increased from
11.9% in 2015 to 13.6% in 2016 and total CAR rose from 17.2% to 20.1%.
In 1Q17, reported profit before tax before excluding one-off items reached US$5.0bn, down
US$1.1bn from last year, mainly because of accounting changes to fair value of debt.
However, looking at pre-tax profits on an adjusted basis, the 1Q17 results came in 12%
higher YoY. We note strong cost controls and a sharp decline in lending impairment charges,
of 70% YoY, as in the previous year, the company recovered provisions set aside against its
oil, gas, metal and mining exposure. The firm’s loan book started to grow from 4Q16, and
momentum continued in 1Q17. We expect its lending book to continue to grow in 2017.
HSBC’s loan book currently stands at approximately US$900bn, with customer deposits at
US$1.3tn. HSBC will grow its risk-weighted assets to use its surplus capital in a profitable
and safe way, lending to high quality customers within its risk appetite profile. Given HSBC’s
leading market position and the recovery in financing demand from the stabilising global
economy, we forecast growth in the firm’s interest-earning assets of 0.2% YoY to US$2.38tn
in 17E, 3.2% YoY to US$2.45tn in 18E and 3.3% YoY to US$2.53tn in 19E. Meanwhile, with
its strong funding capability, we expect HSBC’s liabilities growth to remain stable. We expect
its interest-bearing liabilities to grow 0.1% YoY to US$2.20tn in 17E, 3.4% YoY to US$2.27tn
in 18E and 3.4% YoY to US$2.35tn in 19E.
Over the past three years, HSBC targeted the divestment of some US$280bn in low-return
risk-weighted assets, the bulk of which was in its global banking & markets division. HSBC
achieved that target, which we expect will lead to heightened return on risk weighted assets
in future.
Please refer to the last page for important disclosures Page 31
June 12, 2017
Financials | Company Research
Fig 42: Assets expansion
Source: Company Announcement, SWS Research
Fig 43: Liabilities expansion
Source: Company Announcement, SWS Research
HSBC’s net interest margin have roughly halved form about 3.2% to about 1.6% over the
last 10 years, that is because of the falling interest rates. If rate begins to rise, it would be
helpful to HSBC. Our analysis shows if interest rates goes up by 60bps a year, HSBC will
make USD1.7bn extra revenue, representing 10% more PBT. Actually net interest margin in
1Q17 has rised by 4bps, which is the first quarter HSBC has a NIM increase since 2006. As
the availability of bank loans decline and financing costs increase, we forecast the average
yield on HSBC’s interest-earning assets to increase to 2.41% in 17E, to 2.52% in 18E and
2.58% in 19E.
Backed by its strong surplus capital, HSBC is not considering issuing much more debt,
suggesting interest expense is unlikely to climb significantly. The firm may issue additional
tier-1 capital (AT1) contingent convertible bonds, and may issue some debt in China,
Australia, Taiwan and Japan, but overall the volume of fundraising is unlikely to be very
significant. We expect the company’s average interest-bearing liability costs to increase to
0.88% in 17E, to 0.94% in 18E and to 0.96% in 19E. Thus, we expect its net interest margin
to reach 1.67% in 17E, 1.73% in 18E and 1.75% in 19E, as a result of which, net interest
income will decline 6% YoY to US$28bn in 17E, rebound 7% YoY to US$30bn in 18E and
increase 5% YoY to US$32bn in 19E.
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2007
2009
2011
2013
2015
2017(E)
2019(E)
Total Asset
YoY(RHS)
US$bn
-15%
-10%
-5%
0%
5%
10%
15%
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2007
2009
2011
2013
2015
2017(E)
2019(E)
Total liability
YoY(RHS)
US$bn
Please refer to the last page for important disclosures Page 32
June 12, 2017
Financials | Company Research
Fig 44:HSBC NIM
Fig 45: HSBC interest income
Source: Company Announcement, SWS Research
Source: Company Announcement, SWS Research
We expect the company’s fees and commissions income to fall 5% YoY to US$12bn in 17E,
increase 5% YoY to US$13bn in 18E and 5% YoY to US$13bn in 19E.
Fig 46: Fee income forecasts
Source: Company Announcement, SWS Research
We forecast total revenue growth of -5% YoY to US$45bn, rebounding 6% YoY to US$48bn
and 5% YoY to US$50bn in 19E.
0%
1%
1%
2%
2%
3%
3%
4%
0%
1%
2%
3%
4%
5%
6%
7%
2008
2010
2012
2014
2016
2018(E)
Average asset yield
Average liability cost
Net interest margin(RHS)
-10%
-5%
0%
5%
10%
15%
0
10
20
30
40
50
2007
2009
2011
2013
2015
2017(E)
2019(E)
Interest Income
YoY(RHS)
US$bn
-16%
-12%
-8%
-4%
0%
4%
8%
0
5
10
15
20
25
2007
2009
2011
2013
2015
2017(E)
2019(E)
fee income
YoY(RHS)
US$bn
Please refer to the last page for important disclosures Page 33
June 12, 2017
Financials | Company Research
Fig 47: Operating Income
Source: Company, SWS Research
Operating cost remained broadly flat since 1Q16, as HSBC has sought to simplify and
streamline procedures to raise operational efficiency. This will deliver permanent cost
savings of US$6bn each year, and the programme itself will cost a one-off US$6bn. So far
HSBC has achieved approximately US$4.3bn in savings, and by the end of this year it will
reach US$6bn. After this year there will be no more restructuring costs.
We expect operating expenses to total US$32bn in 17E, representing 70% of revenue,
declining to 69% of revenue in 18E at to US$33bn and to 68% of revenue in 19E to US$34bn.
Fig 48: Expenses ratios
Source: Company Announcement, SWS Research
Loan impairment charges were extremely low in 1Q17, at 0.11% of average lending over the
period. New charges were steady, while releases & recoveries were high, as the company
reduced provisions made in 1Q16 in response to a recovery in commodities prices. Loan
impairment charges typically sit at 0.3-0.4% of lending for the bank, still relatively low.
Given HSBC’s prudent asset portfolio after reducing risk in its loans book, we believe its asset
quality is stabilising amid a global economic recovery. We forecast the company’s non-
performing loan formation ratio will reach 1.09% in 17E, 1.07% in 18E and 1.05% in 19E,
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
0
20
40
60
80
100
2007
2009
2011
2013
2015
2017(E)
2019(E)
Operating income
YoY(RHS)
US$bn
0%
20%
40%
60%
80%
100%
2007
2009
2011
2013
2015
2017(E)
2019(E)
Operating expense/net operating income
Please refer to the last page for important disclosures Page 34
June 12, 2017
Financials | Company Research
with credit costs amounting to 0.35% in 17E, 0.37% in 18E and 0.35% in 19E. Thus, we
forecast an NPL ratio of 2.02% in 17E, 1.88% in 18E and 1.79% in 19E, while its coverage
ratio increases to 45% in 17E, 48% in 18E and 50% in 19E.
Fig 49: HSBC’s NPL generation ratio and credit costs
Fig 50: NPL levels
Source: Company, SWS Research
Source: Company, SWS Research
Fig 51: Provisions and coverage ratio
Source: Company, SWS Research
The bank’s mid- to long-term target ROE is 10%, and, as of 1Q17, HSBC had already achieved
the 10% after excluding one-off items; prior to adjustment, ROE for the period stood at 8%.
We forecast net profit of US$10.2bn in 17E (+685% YoY), US$11.0bn in 18E (+7.9% YoY) and
US$12.0bn in 19E (+8.7%YoY). We forecast EPS of US$0.55 in 17E, US$0.59 in 18E and
US$0.64 in 19E, with ROAE of 5.8% in 17E, 6.2% in 18E and 6.7% in 19E.
0%
10%
20%
30%
40%
50%
60%
0.00%
0.40%
0.80%
1.20%
1.60%
2.00%
2012
2013
2014
2015
2016
2017(E)
2018(E)
2019(E)
NPL formation ratio
Credit cost
Write-off to previous NPLs(RHS)
0%
1%
2%
3%
4%
5%
0
10
20
30
40
50
2007
2009
2011
2013
2015
2017(E)
2019(E)
NPL
NPL ratio(RHS)
US$bn
0%
20%
40%
60%
80%
100%
120%
0
5
10
15
20
25
30
2007
2009
2011
2013
2015
2017(E)
2019(E)
Allowances for impairment losses
NPL coverage(RHS)
US$bn
Please refer to the last page for important disclosures Page 35
June 12, 2017
Financials | Company Research
Fig 52: Net profit forecasts
Fig 53: EPS, BPS and ROAE forecasts
Source: Company, SWS Research
Source: Company, SWS Research
HSBC has always been a bank with strong liquidity and capital. As of end 1Q17, the firm’s
common equity tier-1 (CET-1) capital ratio rose to as high as 14.3%, much stronger as
compared to peers. Typically, HSBC generates 15-20bps to CET-1 capital and targets CET-1
capital of 12-13%. The company’s current capital position has already passed its 2019 target
level. Backed by surplus capital of US$10bn, HSBC began conducting share buybacks in
addition to offering a US$0.51 dividend. So far, HSBC bought back US$3.5bn of shares during
4Q16-1Q17 and may conduct further buybacks in future. However, if the firm’s share price
goes up, HSBC may consider offering a special dividend instead of a share buyback.
HSBC has always been generous in dividend payout. It paid quarterly dividends of US$0.10,
US$0.10, US$0.10 and US$0.21. It aims to maintain dividends at that level for the
foreseeable future. In 2016, it issued a dividend payout higher than its net profit for the
period, thanks to its high capital level, although this cannot last long. HSBC wants to grow
EPS, so dividend payout ratio will fall. Even though HSBC’s share price has gone up a little
bit, US$0.51 is still about a 6% dividend yield and attractive to income funds. Most investors
buying HSBC through the southbound Stock Connect are insurance companies, looking for
long-term income to match their long-term assets.
Valuation
Through a blended three-stage dividend discount model and relative valuation model, we
derive a target price of HK$76.8 for HSBC.
We use our 17-19E net profit forecasts, an assumed 5% annual net profit growth rate for
the following 10 years (2019-28) and a stable dividend payout ratio of 80%. From 2029
onwards, we assume a terminal growth rate of 4% and a dividend payout ratio of 75%. Given
a risk-free rate of 2.9%, a market risk premium of 7% and market beta of 0.9, we arrive at a
discount rate of 9.3% for the company. Based on these assumptions, we arrive at an intrinsic
value of HK$76.4.
Fig 54: Key assumption for DDM model
CAPM component
Assumption
Stage
Profit YoY
Div. payout
Risk-free rate
2.9%
Stage
2017-19
Explicit
86%
Market risk premium
7.1%
Stage
2020-28
5.0%
80%
Beta
0.9x
Stage
Terminal
4.0%
75%
Discount Rate
9.3%
Source: Company, SWS Research
-200%
0%
200%
400%
600%
800%
0
5
10
15
20
25
2007
2009
2011
2013
2015
2017(E)
2019(E)
Net profit
YoY(RHS)
US$bn
0%
5%
10%
15%
20%
25%
30%
35%
0
2
4
6
8
10
12
2007
2009
2011
2013
2015
2017(E)
2019(E)
EPS
BPS
ROAE(RHS)
US$
Please refer to the last page for important disclosures Page 36
June 12, 2017
Financials | Company Research
Fig 55: Sensitivity analysis
Stage II Growth
76.41
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Discount
Rate
7.3%
105.6
113.1
121.1
129.8
139.0
149.0
8.3%
82.4
87.8
93.6
99.9
106.6
113.8
9.3%
67.8
72.0
76.4
81.2
86.3
91.8
10.3%
58.1
61.4
65.0
68.8
72.8
77.2
11.3%
50.9
53.6
56.5
59.7
63.0
66.6
Terminal Growth
76.41
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Discount
Rate
7.3%
88.3
100.9
121.1
159.0
255.3
993.5
8.3%
74.3
82.1
93.6
112.1
146.7
234.4
9.3%
64.1
69.3
76.4
86.8
103.6
134.8
10.3%
56.6
60.2
65.0
71.5
81.0
96.4
11.3%
50.7
53.3
56.5
60.9
66.8
75.6
Source: Company, SWS Research
Currently, HSBC’s peers are trading at 15x 17E PE and 1.2x 17E PB. Based on a comparison
of global peers in terms of earnings momentum, capital position, asset quality, ROE and
dividend yield, we believe that a reasonable PB multiple for HSBC is 1.35x 17E PB, generating
a target price of HK$83.3.
Fig 56: Peer banks performance and valuation comparison
Ticker
Company
Location
Three year CAGR(%)
Loan to
deposit
ratio
NIM
ROAE
Asset
quality
Capital
position
Valuation
Asset
Liability
NPL
ratio
Tier 1
CAR
16A
PB
Dividend
yield
601398.SH
ICBC
China
5.03%
4.56%
72.74%
2.21%
11.94%
1.62%
13.13%
0.89
4.85%
Mainland
601988.SH
BOC
China
4.40%
3.81%
76.12%
1.90%
10.01%
1.48%
12.21%
0.79
4.61%
Mainland
601288.SH
ABC
China
5.28%
4.88%
64.13%
2.31%
12.23%
2.39%
11.03%
0.82
5.10%
Mainland
601939.SH
CCB
China
6.41%
6.17%
75.38%
2.32%
12.95%
1.56%
13.54%
0.83
4.58%
Mainland
601328.SH
BOCOM
China
8.18%
8.21%
85.09%
1.97%
9.14%
1.53%
12.30%
0.76
4.05%
Mainland
2888.HK
SCB
China
-1.43%
-1.55%
75.30%
1.73%
4.83%
14.10%
0.68
0.00%
HK
0005.HK
HSBC
China
-1.79%
-1.93%
67.7%
1.73%
0.71%
1.90
16.10%
1.08
5.92%
HK
0023.HK
BEA
China
-2.06%
-3.02%
82.56%
1.73%
4.10%
13.50%
1.07
1.70%
HK
0011.HK
HS
China
3.38%
2.93%
70.46%
1.74%
12.10%
17.90%
2.22
3.74%
HK
BAC.N
BOA
EU & US
0.25%
-0.24%
72.62%
2.25%
6.71%
13.60%
1.02
1.02%
JPM.N
JPM
EU & US
-0.72%
-1.17%
65.07%
2.25%
10%
14.20%
1.41
2.08%
Please refer to the last page for important disclosures Page 37
June 12, 2017
Financials | Company Research
C.N
CITI
EU & US
-1.61%
-2.23%
70.29%
2.93%
6.60%
14.20%
0.81
0.70%
WFC.N
WELLS F
EU & US
5.72%
5.97%
76.11%
2.86%
11.49%
13.03%
1.66
2.61%
GS.N
GS
EU & US
1.41%
1.35%
-
0.41%
9.18%
13.50%
1.32
1.04%
RY.N
RBC
EU & US
8.69%
8.62%
69.15%
1.70%
16.30%
12.30%
2.29
3.27%
DB.N
DB
EU & US
76.33%
1.61%
-2.30%
1.88%
15.70%
0.41
0.00%
GLE.PA
SG
EU & US
110.68%
0.90%
7.30%
5.43%
14.50%
0.54
5.09%
average
13.81%
1.1
2.97%
Source: SWS Research
Fig 57:PE band of HSBC
Fig 58: PB band of HSBC
Source: Bloomberg, SWS Research
Source: Bloomberg, SWS Research
Initiate at Outperform
Combining these two methods, we derive a target price of HK$79.9, with 16% upside
potential, we initiate our coverage of HSBC with Outperform rating.
We note that the company’s share price is correlated with perceptions of global economic
conditions; we see upside catalysts in the event of further signals of global economic growth
stability as well as improving earnings momentum.
Given HSBC’s exposure to global economic growth, a sharp slowdown in growth may
adversely impact the company’s valuation more than its peers. Likewise, an unexpected
tightening of monetary policy by the domestic central bank may pose a risk to our target
valuation.
Please refer to the last page for important disclosures Page 38
June 12, 2017
Financials | Company Research
Appendix
Figure 1: Income Statement Forecast
USDm
2007
2008
2009
2010
2011
2012
2013
2014(E)
2015(E)
2016(E)
2017(E)
2018(E)
2019(E)
Interest Income
92,359
91,301
62,096
58,345
63,005
56,702
51,192
50,955
47,189
42,414
40,517
43,915
46,397
Interest expense
(54,564)
(48,738)
(21,366)
(18,904)
(22,343)
(19,030)
(15,653)
(16,250)
(14,658)
(12,601)
(12,437)
(13,843)
(14,805)
Net interest income
37,795
42,563
40,730
39,441
40,662
37,672
35,539
34,705
32,531
29,813
28,080
30,071
31,592
Fee and commission
income
26,337
24,764
21,403
21,117
21,497
20,149
19,973
19,545
18,016
15,669
14,886
15,630
16,411
Fee and commission
expense
(4,335)
(4,740)
(3,739)
(3,762)
(4,337)
(3,719)
(3,539)
(3,588)
(3,311)
(2,892)
(2,747)
(2,885)
(3,029)
Net fee and commission income
22,002
20,024
17,664
17,355
17,160
16,430
16,434
15,957
14,705
12,777
12,138
12,745
13,382
Other operating income
27,804
25,984
20,237
23,218
25,639
28,443
26,364
23,931
23,856
17,246
5,002
5,003
5,004
Operating income
87,601
88,571
78,631
80,014
83,461
82,545
78,337
74,593
71,092
59,836
45,220
47,819
49,978
Operating expense
(47,650)
(55,988)
(46,845)
(49,455)
(52,726)
(57,142)
(52,248)
(54,594)
(51,060)
(51,678)
(31,654)
(32,995)
(33,985)
Business tax
and surcharges
0
0
0
Operating profit
before provisions
39,951
32,583
31,786
30,559
30,735
25,403
26,089
19,999
20,032
8,158
13,566
14,824
15,993
Provision for
impairment losses
(17,242)
(24,937)
(26,488)
(14,039)
(12,127)
(8,311)
(5,849)
(3,851)
(3,721)
(3,400)
(3,047)
(3,297)
(3,275)
Share of profits of an associate
1,503
1,661
1,781
2,517
3,264
3,557
2,325
2,532
2,556
2,354
2,354
2,354
2,354
Profit before tax
24,212
9,307
7,079
19,037
21,872
20,649
22,565
18,680
18,867
7,112
12,873
13,881
15,072
Income tax
(3,757)
(2,809)
(385)
(4,846)
(3,928)
(5,315)
(4,765)
(3,975)
(3,771)
(3,666)
(2,575)
(2,776)
(3,014)
Minority interest
1,322
770
860
1,032
1,147
1,307
1,596
1,590
2,524
2,147
101
102
103
Net profit attributable
to equity holders of the bank
19,133
5,728
5,834
13,159
16,797
14,027
16,204
13,115
12,572
1,299
10,197
11,003
11,955
Source: Company, SWS Research
Figure 2: Balance sheet forecast
USDm
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017(E)
2018(E)
2019(E)
Assets
Cash and Balance with central bank
21,765
52,396
60,655
57,383
129,902
141,532
166,599
129,957
98,934
128,009
125,449
131,721
138,307
Cash/balances/Placements with
banks and other financial institutions
261,036
175,127
203,639
233,400
210,117
182,592
330,977
306,463
270,834
285,331
233,486
208,812
183,684
Loans and advances to customers
981,548
932,868
896,231
958,366
940,429
997,623
992,089
974,660
924,454
861,504
904,579
949,808
997,299
Investments
770,532
756,097
827,720
822,818
800,909
882,763
767,547
748,697
721,544
701,067
715,088
750,843
788,385
Non-interest-bearing assets
319,385
610,977
376,207
382,722
474,222
488,028
414,106
474,362
393,890
399,075
399,619
412,258
425,687
Total
2,354,266
2,527,465
2,364,452
2,454,689
2,555,579
2,692,538
2,671,318
2,634,139
2,409,656
2,374,986
2,378,221
2,453,443
2,533,362
Liabilities
Deposits/Placements from
banks and other
financial institutions
154,746
152,674
148,069
136,304
142,489
137,309
282,857
218,522
168,819
186,102
201,875
208,260
215,044
Deposits from customers
1,096,140
1,115,327
1,159,034
1,227,725
1,253,925
1,340,014
1,361,297
1,350,642
1,289,586
1,272,386
1,246,938
1,309,285
1,374,749
Debts issued
246,579
179,693
146,896
145,401
131,013
119,461
104,080
95,947
88,949
65,915
65,915
65,915
65,915
Trading and Derivative liabilities
587,912
809,299
595,868
647,501
718,496
756,187
570,393
607,394
525,933
523,132
523,132
523,132
523,132
Non interest-bearing liabilities
133,473
170,243
178,924
142,843
143,563
156,438
162,232
161,656
138,851
144,873
157,151
162,122
167,403
Total
2,218,850
2,427,236
2,228,791
2,299,774
2,389,486
2,509,409
2,480,859
2,434,161
2,212,138
2,192,408
2,195,011
2,268,714
2,346,243
Shareholders' equity
Share capital
5,915
6,053
8,705
8,843
8,934
9,238
9,415
9,609
9,842
10,096
10,096
10,096
10,096
Reserves
41,148
6,849
32,782
41,474
37,923
45,657
43,728
43,694
34,642
28,495
31,944
38,304
45,191
Retained Earnings
81,097
80,689
86,812
97,350
111,868
120,347
128,728
137,144
143,976
136,795
134,079
129,340
124,945
Total shareholders' equity
128,160
93,591
128,299
147,667
158,725
175,242
181,871
190,447
188,460
175,386
176,119
177,740
180,233
Minority Interests
7,256
6,638
7,362
7,248
7,368
7,887
8,588
9,531
9,058
7,192
7,091
6,989
6,886
Total shareholders'
equity and liabilities
2,354,266
2,527,465
2,364,452
2,454,689
2,555,579
2,692,538
2,671,318
2,634,139
2,409,656
2,374,986
2,378,221
2,453,443
2,533,362
Source: Company, SWS Research
Please refer to the last page for important disclosures Page 39
June 12, 2017
Financials | Company Research
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When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we
define the terms as follows:
Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period.
BUY: Share price performance is expected to generate more than 20% upside over a 12-month period.
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Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period.
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When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report,
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