We have maintained our long-term Underperform recommendation on HSBC Holdings Plc. (HBC) based on the company’s weak revenue growth across the mature markets and overall negative impact due to the deepening Euro-zone crisis. Additionally, high inflation in some key Asian markets, sluggish loan growth, insufficient core operating performance and high wage inflation are expected to restrict its growth, at least in the near term.
However, in 2011, HSBC reported 28% year-over-year increase in net profit. Further, the company is poised to benefit from its extensive global network, strong capital position and business re-engineering efforts. Also, cost containment initiatives will enable the company to deal with the economic pressures to a great extent.
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 remained unsatisfactory. We believe that it would be difficult for the company to sustain in sluggish economy coupled with low interest rate environment.
Further, we remain concerned about the performance of Global Banking and Markets segment as there are no signs of abatement of pressure from the European sovereign debt crisis. Also, lack of loan growth in Asian countries is a major cause of concern.
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 time soon. In 2011, total operating expenses were $41.5 billion, up 10% from $37.7 billion in the prior year. We expect the re-engineering efforts undertaken by the company, to lower cost, will take some time.
However, all is not bad for the company. There are some positives such as HSBC’s brand, capital strength and extensive global network, which enable it to attract and retain clients. In an effort to further enhance its competitive advantage, HSBC is also trying to increase its emerging-market exposure. The company has been also 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 growth.
Moreover, 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, the time when many financial institutions suffered a lot. 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.
HSBC currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, the company’s closest peer – Barclays Plc. (BCS) retains a Zacks #1 Rank (a short-term Strong Buy rating).
To read this article on Zacks.com click here.
Zacks Investment Research
