HSBC Remains on the Sidelines - Analyst Blog

By Zacks Equity Research,

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We are maintaining a long-term Neutral recommendation on HSBC Holdings plc ( HBC ), based on the successful implementation of its restructuring initiatives. However, for the first half of 2012, the company's net income was down nearly 7% year over year.

Additionally, factors that continue to rankle include the impact of the deepening Euro-zone crisis, various investigations related to its business operations and regulatory restrictions on its financials.

HSBC's results were adversely affected by higher operating expenses, partly offset by slight improvement in revenue and growth in total operating income. The financials were also negatively impacted by the poor performance of Global Private Banking division and loss in the Other segment. Nevertheless, decent performances by the other three divisions were the upsides.

In 2011, HSBC announced its plans of restructuring the business with the primary intention of increasing focus on the fast-growing and profitable markets. As of July 30, the company announced the divestiture or closure of 36 of its businesses, thereby recording $2.7 billion of annualized cost savings.

Some of the major divestitures completed include the sale of U.S. credit card business to Capital One Financial Corporation ( COF ) and 195 branches to First Niagara Bank, N.A., a wing of First Niagara Financial Group Inc. ( FNFG ).

Further, despite the uncertain macro environment, HSBC remains strong with respect to its balance sheet and capital position. At the end of the first six months of 2012, core tier 1 ratio improved to 11.3% from 10.8% in the prior-year period.

We believe this capital strength will allow HSBC to enhance its profitable market share. Also, as a consequence of capital strength, unlike many of its peers, the company continued to pay dividends over the last three years, though at a reduced rate.

Additionally, HSBC's brand name, capital strength and extensive global network enable it to attract and retain clients. In an effort to further enhance its competitive advantage, the company is trying to bolster its emerging-market exposure. The company has also been taking advantage of higher-growth, lower-cost regions such as China and India, to set up major back-office operations, which are likely to boost the bottom line.

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.

We believe that rising wage inflation in faster-growing markets and strategic investments will not allow HSBC to make the cost line favorable any time soon. In the first six months of 2012, the underlying cost efficiency ratio deteriorated to 61.0% from 57.7% in the prior-year period and was also substantially higher than the company's target range of 48-52%. However, the re-engineering efforts undertaken by the company to lower costs will take some time.

HSBC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

CAPITAL ONE FIN (COF): Free Stock Analysis Report
FIRST NIAGARA (FNFG): Free Stock Analysis Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: COF , FNFG , HBC

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