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HSBC Holdings: NIM – Decade Long Decline

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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:

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:


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.

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