Saturday, March 27, 2010

HSBC [morgan stanley research] Equalweight rating $HBC

FY09: Revenue slowdown
Revenue weakness in 2H09: To its credit, HSBC has delivered earnings and dividends in each year of the crisis. However, as we expected in “Key themes for FY09 results” (25 February 2010), GBM was weaker in 2H09. In addition, HSBC has guided that given current market conditions and proposed Basel 3 changes under consideration, its return on average total shareholders equity over the medium term is likely to be at the low end of the target range (15-19%) and may be revised. GBM slower in 2H09: Underlying

GBM revenue was $22.1bn (MSe $24.2bn) with $9.1bn in 2H09 versus $13.0bn 1H09. Balance Sheet Management slowed, as we expected from $3.4bn 1H09 to $2bn 2H09 and
HSBC guides FY10 lower than FY09. The combined credit (pre-marks), rates and FX businesses declined ~52% from $5.6bn 1H09 to $2.7bn 2H09. Spreads in FX are now back to 2007 level. We expect GBM to be lower in 2010.

Asia organic PBT 2H09 flat vs 1H09: Asia (HK and Rest of Asia) at $3.8bn (pre Associates). We expect Asian earnings to stay under some pressure in a low rate scenario.

Costs and capital were a positive: The bank reported core tier 1 of 9.4%, which was better than we expected. Moreover, AFS reserve reduced to US$12.2bn from US$17.5bn in June 09. It also displayed good cost control, especially in the GBM.

Consensus likely to decline: Our 2012 EPS forecast (before FY09 results) of $1.11 implies a stated ROE of ~14% vs Factset consensus of $1.35 which implies an ROE of around 17%. With management saying that they expect the medium term ROE at the lower end of the target range, consensus earnings may decline.

Asian peers preferred: We see a better risk/reward relationship with many Asian peers (e.g., CCB, ICBC). They have stronger earnings growth, lower regulatory pressure (hence no or little impact on ROE) and little overhang from developed market weakness.

HSBC Finance MS Research

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