HSBC Holdings: NIM – Decade Long Decline

An Investec analyst reaffirmed his Buy rating on HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA), as he believes the bank will witness receding headwinds going forward.

Ian Gordon of Investec has pegged HSBC’s target price at 745p using RoE/CoE-g methodology.

NIM – Decade long decline

Thanks to run-off of high margin/low quality business in North America, strategic disposals and the impact of near-zero interest rates for a deposit-rich bank, HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) reported a decade-long decline in the Net Interest Margin. This can be evidenced from the following graph:

HSBC Holdings' Decade long decline in NIM

However, the Investec analyst believes these headwinds should significantly abate in 2014e and beyond, thanks to lower North American run-off and stable Balance Sheet Management revenues. The analyst points out HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA)’s NIM still declined by c.8bps to 2.09% in H2 2013 as against 2.17% in H12013. The analyst however believes the incremental pain is largely over for HSBC, though any material benefit from rising interest rates may still be 2/3 years away.

Projects strong dividend growth

The Investec analyst points out the FY 13 dividend for HSBC is raised by 9% to 49c as against consensus 51c, with a payout ratio of 58% and a dividend yield of 4.5%. The analyst anticipates significant improvement in HSBC’s dividend yield to c.6% by 2016e.  Moreover, the analyst points out HSBC’s CET1 CRD IV ratio of 10.9% remains robust, making HSBC by far the strongest of any UK bank.

The following graph captures the evolution of HSBC’s EPS and DPS including the analyst’s forecast for 2014-16e:

EPS and DPS

HSBC Holdings’ improved customer loan growth

Ian Gordon of Investec points out though HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA)’s customer loan growth at 3% year-on-year may appear weak when compared to Standard Chartered PLC (LON:STAN), the growth is a notable improvement for HSBC, following a 3% decline reported in H1. The following graph captures the evolution of HSBC’s customer loans by geography:

customer loans by geography

Turning his focus on the RoEs, the analyst anticipates HSBC’s ROEs in the range of 9.7 to 11.5% through 2014-16e as against 9.2% clocked in 2013. However, the analyst doesn’t expect delivery against HSBC’s 12% ROE target before 2017e.

The following graph highlights the summary income statement of HSBC:

summary income statement

While reiterating his Buy recommendation on HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA), the analyst points out that HSBC might face challenges from emerging market volatility and the evolution of interest rates and FX.



About the Author

Mani
Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports