We have upgraded our long-term recommendation on
HSBC Holdings plc
) to Neutral from Underperform, based on the success of its
restructuring initiatives. The company remains on track to achieve
cost savings of $3.5 billion by 2013 and streamline its operations
as well as improve its top line.
However, for the first quarter of 2012, HSBC reported an
approximate 34% drop in net income attributable to lower fee and
dividend income. These were partially offset by increases in the
net interest income and net trading fees. Moreover, we remain
concerned regarding the negative impact of the deepening Euro-zone
crisis, weak revenue growth in its mature markets and regulatory
restrictions on the company's financials.
Last year, HSBC announced its plans of restructuring the
business with the primary intention of increasing focus on the
fast-growing and profitable markets. As of May 17, the company
announced the divestiture or closure of 28 of its businesses.
Some of the major divestitures completed recently include the
sale of U.S. credit card business to
Capital One Financial Corporation
) and 195 branches to First Niagara Bank, N.A., a unit of
First Niagara Financial Group Inc.
Additionally, HSBC's brand, capital strength and extensive
global network enables it to attract and retain clients. In an
effort to further enhance its competitive advantage, the company is
trying to increase 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.
Also, continuously improving profitability ratios are a major
positive for HSBC. In addition to that, the company has been able
to remain profitable during the financial crisis, a time when many
financial institutions suffered. In 2011, 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. We believe that it would be
difficult for the company to sustain in a sluggish economy coupled
with low interest rate environment and increased regulations.
Further, despite management's efforts to lower costs, we believe
that rising wage inflation in faster-growing markets and strategic
investments will not allow HSBC to make the cost line favorable any
In the first quarter of 2012, though the underlying cost
efficiency ratio improved to 55.5% from 58.7% in the prior-year
quarter, it still remained substantially higher than the company's
target range of 48-52%. We expect that 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.
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