We are maintaining a long-term 'Neutral' recommendation on
HSBC Holdings plc
) as its restructuring initiatives for streamlining operations
and improving top line remain on track. However, factors that
continue to adversely impact the company's financials include the
deepening Euro-zone crisis, various investigations related to its
business operations and regulatory restrictions.
In 2011, HSBC announced its plans to restructure the business
with the primary intention of increasing focus on the
fast-growing and profitable markets. Some of the major
divestitures completed include the sale of its U.S. credit card
Capital One Financial Corporation
) and 195 of its branches to First Niagara Bank, N.A. - a wing of
First Niagara Financial Group Inc.
Further, despite the uncertain macro environment, HSBC remains
strong with respect to its balance sheet and capital position. We
expect this capital strength will allow the company to enhance
its profitable market share. Also, due to its strong capital
base, unlike many of its peers, the company was able to pay
dividends over the last three years, though at a reduced rate.
Additionally, improving profitability ratios are a major positive
at HSBC. Despite the global turmoil during the last few years,
the company has been able to remain profitable in a situation
where financial institutions suffered the most. In 2011, the
bank's return on average equity and return on risk-weighted
assets increased to 10.9% and 1.9%, respectively, from 9.5% and
1.7% in the previous year.
On the flip side, though HSBC has been reporting stable operating
income over the last several quarters, growth in core business
performance indicators, including net interest income and fee
income, has been unsatisfactory. Additionally, the company would
find it difficult to sustain in a sluggish economy, coupled with
low interest rate environment and increased regulations.
Also, relatively high inflation and wage pressures in some major
Asian markets, where the company is increasing its investments,
could hamper HSBC's business growth in the region. Housing price
inflation in some of the Asian markets is very high, raising
risks of asset-quality troubles for company. Though HSBC's
usually-conservative nature may protect it to some extent, it
will not be possible to remain unscathed.
HSBC is scheduled to announce its third quarter 2012 results
early next week. We expect the company to benefit from the stable
performances of its operating segments and growth in overall
revenue. Further, the company is well positioned to benefit from
its extensive global network, diversified revenue sources and
strong capital position.
HSBC currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
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