We have lowered our long-term recommendation on
HSBC Holdings plc
) to 'Underperform' from 'Neutral'. This is based on the recent
penalty imposed on the company for its involvement in money
laundering and its credit ratings downgrade by Fitch Ratings.
Yet, we expect the company to benefit from its restructuring
initiatives, extensive global network, diversified revenue
sources and strong capital position.
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HSBC HOLDINGS (HBC): Free Stock Analysis
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In December 2012, HSBC reached a settlement with the U.S. law
enforcement authorities in the money laundering case. The company
agreed to pay a fine of roughly $1.9 billion for its misdeeds and
undertake measures to prevent such issues going forward. Although
the settlement comes as a relief since it would reduce litigation
overhangs and legal costs, it will exhaust the company's
financials to a great extent.
Also, Fitch lowered HSBC's long-term Issuer Default Ratings (IDR)
to reflect its expansion into the high-growth and high-risk
markets. The rating agency believes that the advantage the
company gains from its diversified operations is mostly mitigated
by the cost of maintaining and managing huge business globally.
We expect the ratings downgrade to lead to a hike in the already
high funding cost of the company.
Further, revenue growth remained restrained in recent years as a
continued low interest rate environment pressured revenue
generation from several corners. As growth remains muted in
HSBC's mature markets (Europe, UK, and the U.S.), overall
improvement in revenue is expected to remain under pressure in
the upcoming quarters as well. Moreover, new regulations are
expected to restrict fee income growth.
Though management has been working hard on its cost
rationalization efforts, rising wage inflation in its
faster-growing markets along with strategic investments will not
allow HSBC to make the cost line favorable any time soon. We also
expect that the re-engineering efforts taken by the company to
reduce cost will take some time to remove inefficiencies.
Nevertheless, the situation is not as bad at HSBC as it seems.
The company expects the targeted cost savings of up to $3.5
billion to exceed the limit by the end of 2013. Further, the
company remains on track with its long-term strategy of slashing
its global workforce by 30,000. In 2011, the company had
announced its plan to restructure the businesses. Some of the
major divestitures completed include the sale of its U.S. credit
card business to
Capital One Financial Corporation
) and 195 of its branches to First Niagara Bank, N.A. - a wing of
First Niagara Financial Group Inc.
Additionally, despite the uncertain macro environment, HSBC
remains strong with respect to its balance sheet and capital
position, which is definitely a competitive advantage over other
banks. We anticipate this capital strength to allow HSBC to
enhance its profitable market share. Also, owing to its strong
capital base, unlike many of its peers, HSBC continued to pay
dividends over the last few years, though at a reduced rate.
HSBC currently retains a Zacks #4 Rank, which translates into a
short-term Sell rating.