Deutsche Bank Markets Research

Rating Company Date 16 February 2017 Hold HSBC Holdings Plc Forecast Change Asia Hong Kong Reuters Bloomberg Exchange Ticker Price at 15 Feb 2017 (HKD) 67.70 Banking / Finance 0005.HK 5 HK HSI 0005 Price target - 12mth (HKD) 64.00 Banks ADR Ticker ISIN 52-week range (HKD) 67.70 - 45.80 HBC US4042804066 HANG SENG INDEX 23,995

Rate re-rating Stephen Andrews, CFA Research Analyst (+852 ) - 2203 6191 Look East not West for rate sensitivity [email protected] As discussed in our 'Capital Map' report last year, the bulk of HSBC's returns and shareholder value lies in the Asia franchise. When it comes to rising US$ David Lock interest rates, the majority of sensitivity to higher rates is also in Asia (HK balances are 3x those of the US IHC balance sheet). This note takes a closer Research Analyst look at the key sensitivities of the bank to interest rates, from a top-down, (+44) 20 754-11521 bottom-up and historical perspective. Overall we think that the recent share re- [email protected] rating can be explained largely by expectations that HIBOR moves up steadily by c.150bps over the next 3 years. Our forecasts rise by 5-10%, reflecting Key changes higher NII. Our TP rises to 64HKD, but with limited catalysts we remain Hold. Price target 56.00 to 64.00 ↑ 14.3% Top down and bottom up - Asia is the key driver Net int margin 1.92 to 1.89 ↓ -1.3% HSBC's interim report shows the impact of a 100bps parallel shift in the yield (FYE) curve over a 12 month period as c.US$2.7bn annualised, or around 15% of Net profit 7,299.5 to ↓ -1.9% post-tax earnings. We would also expect reduced AFS values, impacting TNAV (FYE) 7,162.5 Source: Deutsche Bank and capital in the near term. Looking in more detail at the Asian business and assuming that HIBOR moves up steadily by another c.150bps by FY2019 we Price/price relative estimate this should equate to c.30-35bps NIM improvement in HBAP (c.25- 30bps for group NIM). Meanwhile a return to mid-single digit volume growth in 90 HK combined with a rising impairment charge should be sufficient to drive a 80 150-200bps improvement in HK RoE. This explains the bulk of the recent re- 70 rating of the shares, we think. 60 4Q16 results: management commentary on rising rates + buybacks key 50 40 HSBC reports results on 21 February 2016 at 4am UKT. We forecast adjusted 2/15 8/15 2/16 8/16

PBT of US$3.7bn, slightly ahead of consensus at US$3.5bn. Key issues on HSBC Holdings Plc results day are likely to be on management commentary on the outlook and HANG SENG INDEX (Rebased)

sensitivity of interest rates, as well as questions on the potential for further Performance (%) 1m 3m 12m dividends / buybacks. We expect some headwinds to TNAV in Q4 from higher rates / stronger USD. Absolute 5.8 9.9 34.7 HANG SENG INDEX 4.6 7.5 26.8 Valuation & Risks, TP rises to 64HKD Source: Deutsche Bank

We value HSBC using a combination of SoTP and DDM and a cost of equity of 9.5%. This results in a TP of 64HKD, raised from 56HKD previously. We have 6% downside to the share price and we retain a Hold rating. HSBC is trading at 1.2x TNAV, 11.8x 2018 EPS for a running dividend yield of 5.8% and a RoTE of 10% in 2018/19. Key upside risks: faster improvement in rates, better loan growth, reduced regulation, faster capital upstream from US, higher buyback. Key downside risks: lower rate expectations, lower loan growth, higher impairments, harsher regulation, lower buyback.

Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E EPS (USD) 0.69 0.65 0.36 0.58 0.74 PER (x) 13.8 12.3 24.2 15.0 11.8 Price/book (x) 1.03 0.91 1.04 1.02 0.98 DPS (net) (USD) 0.50 0.51 0.51 0.51 0.51 Source: Deutsche Bank estimates, company data

______Deutsche Bank AG/Hong Kong Distributed on: 16/02/2017 07:09:36 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

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Banks HSBC Holdings Plc

Model updated:16 February 2017 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Running the numbers Data Per Share Asia EPS (stated)(USD) 0.84 0.69 0.65 0.36 0.58 0.74 EPS (DB) (USD) 0.79 0.82 0.68 0.64 0.71 0.75 Hong Kong Growth Rate - EPS (DB) (%) -16.8 3.7 -17.2 -5.9 11.3 5.9 DPS (USD) 0.49 0.50 0.51 0.51 0.51 0.51 Banks BVPS (stated) (USD) 9.27 9.24 8.73 8.40 8.55 8.87 Tang. NAV p. sh. (USD) 7.76 7.80 7.48 7.34 7.48 7.79 HSBC Holdings Plc Market Capitalisation 204,299 183,368 157,220 172,550 172,550 172,550 Shares in issue 18,654 19,056 19,517 19,733 19,713 19,577 Reuters: 0005.HK Bloomberg: 5 HK Valuation Ratios & Profitability Measures Hold P/E (stated) 12.9 13.8 12.3 24.2 15.0 11.8 P/E (DB) 13.8 11.7 11.8 13.7 12.3 11.6 Price (15 Feb 17) HKD 67.70 P/B (stated) 1.2 1.0 0.9 1.0 1.0 1.0 Target Price HKD 64.00 P/Tangible equity (DB) 1.4 1.2 1.1 1.2 1.2 1.1 ROE(stated)(%) 9.1 7.4 7.2 4.2 6.8 8.5 52 Week range HKD 45.80 - 67.70 ROTE (tangible equity) (%) 10.3 10.5 8.9 8.6 9.6 9.8 ROIC (invested capital) (%) 8.6 8.8 7.6 7.4 8.4 8.6 Market Cap (m) HKDm 1,339,187 Dividend yield(%) 4.5 4.8 5.9 5.8 5.8 5.8 USDm 172,550 Dividend cover(x) 1.7 1.4 1.3 0.7 1.1 1.4

Profit & Loss (USDm) Company Profile Net interest revenue 35,535 34,705 32,531 30,415 30,070 31,691 HSBC is one of the world's leading banking and financial Non interest income 29,266 26,704 27,308 21,006 22,763 23,215 institutions with c.6,600 offices and 58 million customers Commissions 0 0 0 0 0 0 in 81 countries across Europe, Hong Kong, Asia-Pacific, Trading Revenue 0 0 0 0 0 0 Middle East, North Africa, North America and Latin Other revenue 29,266 26,704 27,308 21,006 22,763 23,215 America. At FY12 46% of its loan book was in Europe, Total revenue 64,801 61,409 59,839 51,421 52,833 54,905 17% in Hong Kong, 17% in Asia & Middle East, 14% in Total Operating Costs 38,712 41,410 39,807 36,891 33,099 30,238 North America and 5% in Latin America. HSBC has 4 main Employee Costs 0 0 0 0 0 0 business divisions: Retail Banking & Wealth Management, Other costs 38,712 41,410 39,807 36,891 33,099 30,238 Commercial Banking, Global Banking and Markets and Pre-Provision profit/(loss) 26,089 19,999 20,032 14,530 19,734 24,668 Global . At FY12 38% of loan balances Bad debt expense 5,849 3,851 3,721 3,846 3,769 4,327 were in RBWM, 29% in Commercial, 28% in GBM, and 5% Operating Profit 20,240 16,148 16,311 10,684 15,964 20,341 in Private Banking. Pre-tax associates 2,325 2,532 2,556 2,488 2,465 2,411 Pre-tax profit 22,565 18,680 18,867 13,172 18,429 22,752 Tax 4,765 3,975 3,771 3,774 4,792 5,915 Other post tax items -2,169 -1,590 -2,524 -2,236 -2,268 -2,300 Stated net profit 15,631 13,115 12,572 7,162 11,370 14,536 Goodwill 0 0 0 0 0 0 Extraordinary & Other items -935 2,456 626 5,394 2,590 148 Bad Debt Provisioning 0 0 0 0 0 0 Investment reval, cap gains / losses 0 0 0 0 0 0 DB adj. core earnings 14,696 15,571 13,198 12,557 13,960 14,684

Key Balance Sheet Items (USDm) & Capital Ratios Risk-weighted assets 1,214,939 1,219,800 1,102,995 894,508 886,445 901,395 Interest-earning assets 992,089 974,660 924,454 877,016 865,628 878,348 Customer Loans 992,089 974,660 924,454 877,016 865,628 878,348 Total Deposits 1,370,653 1,350,642 1,289,586 1,293,298 1,279,781 1,285,237 Stated Shareholder Equity 174,615 177,510 171,943 166,161 167,948 172,971 Equals: Tangible Equity 146,078 149,933 147,338 145,219 147,007 152,029 Tier 1 capital 145,641 152,739 153,303 143,659 145,446 150,469 Tier 1 ratio (%) 12 13 14 16 16 17 o/w core tier 1 capital ratio (%) 10.8 10.9 11.9 13.9 14.2 14.4

Credit Quality Gross NPLs/Total Loans(%) 3.67 3.00 2.57 3.00 3.00 3.00 Risk Provisions/NPLs(%) 42 42 40 40 40 40 Bad debt / Avg loans (%) 0.59 0.39 0.39 0.43 0.43 0.50 Bad debt/Pre-Provision Profit(%) 22.4 19.3 18.6 26.5 19.1 17.5

Growth Rates & Key Ratios Growth in revenues (%) -5 -5 -3 -14 3 4 Growth in costs (%) -10 7 -4 -7 -10 -9 Growth in bad debts (%) -30 -34 -3 3 -2 15 Growth in RWA (%) 8 0 -10 -19 -1 2 Net int. margin (%) 2.13 1.94 1.92 1.89 1.90 1.97 Cap.-market rev. / Total revs (%) nm nm nm nm nm nm Total loans / Total deposits (%) 72 72 72 68 68 68

ROTE Decomposition Revenue % ARWAs 5.54 5.04 5.15 5.15 5.93 6.14 Net interest revenue % ARWA 3.04 2.85 2.80 3.05 3.38 3.55 Non interest revenue % ARWA 2.50 2.19 2.35 2.10 2.56 2.60 Costs/income ratio (%) 59.7 67.4 66.5 71.7 62.6 55.1 Bad debts % ARWAs 0.50 0.32 0.32 0.39 0.42 0.48 Tax rate (%) 23.5 24.6 23.1 35.3 30.0 29.1 Adj. Attr. earnings % ARWA 1.06 1.07 0.92 1.01 1.29 1.37 Capital leverage (ARWA/Equity) 8.2 8.2 7.8 6.8 6.1 6.0 ROTE (Adj. earnings/Ave. equity) 8.7 8.8 7.2 6.9 7.9 8.2

Source: Company data, Deutsche Bank estimates

Stephen Andrews, CFA +852 - 2203 6191 [email protected]

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Banks HSBC Holdings Plc

Rate re-rating

Revisiting rate sensitivity: HK remain key

HSBC’s Asian operations continue to be the core store of shareholder value for the group (as we laid out in our August 2016 report: Capital Map: The cost of “being HSBC”). Via its dominant presence in Hong Kong it is also home to the majority of the group’s earnings leverage to rising US interest rates. Whilst the group does still have a big US business the balance sheet is relatively small in comparison to the US$ linked Asian operations. HSBC’s North American operations have now been put into an Intermediate Holding Company (IHC) and as of the end of Q3 this had asset of cUS$300bn. This is less than 1/3rd the size of HSBC Asian operations where its major subsidiary is the Hong Kong Shanghai Banking Corporation (HBAP for short). Indeed HBAP’s HK balance sheet, which is largely US$ and HK$ denominated, is over twice the size of its US operations. In terms of “excess liquidity” the gap is even more pronounced. So to understand HSBC group’s US rate leverage you really have to look east from London not west. As such the focus of this section of the report is on HBAP and Asia.

Figure 1: Relative size of HSBC US holding company Figure 2: Excess liquidity (Deposits less loans) HSBC US balance sheet Vs HBAP (& split HK Vs Rest of APAC, holding company vs HBAP (US$ mn) US$mn) 1,000,000 300,000 900,000 250,000 800,000

700,000 200,000 600,000

500,000 150,000

400,000 100,000 300,000

200,000 50,000 100,000

0 0 US IHC HBAP HBAP HK HBAP RoAPAC US IHC HBAP HBAP HK HBAP RoAPAC

Source: Deutsche Bank Source: Deutsche Bank

Group disclosure suggests c15% PBT impact from 100bps rate rises In terms of the group overall earnings sensitivity to movements in interest rates HSBC’s own disclosure illustrates this below (taken from the HSBC Group 2016 interim report). This shows the impact of a 100bps parallel shift in the yield curve over a 12 month period on net interest income (modeled as a 25bps rise at the start of each quarter). To get the impact on HSBC group profitability we annualize this number (to estimate the full year impact of the quarterly 25bps rise), assume pretty much all of it drops to the pre-tax level and then tax it at the group incremental tax rate (we use 26%). This suggests a boost to net profit of cUS$2bn which is about 15% of group earnings. If we place this on 10x earnings it is equivalent to roughly 12% of market cap. As you would expect given the HK$/US$ peg most of the upside relates to the

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Banks HSBC Holdings Plc

group’s US$ and HK$ blocks. As we showed in the charts above a lot of this excess liquidity we believe sits in Hong Kong.

Figure 3: HSBC group estimated impact of a 100bps parallel shift in the yield curve over a 12 month period US$ bloc Rest of HK$ bloc Rest of Asia Sterling Bloc Euro bloc Total Est. Post tax Americas bloc Annualised bloc impact +25bps 496 57 615 2 82 121 1,373 2,746 2,032 -25bps -779 -62 -817 -79 -442 -22 -2,201 -4,402 -3,257 Source: Company data, Deutsche Bank

There will also be an impact from negative mark to market losses on the group’s bond portfolios if rates move up. These are typically largely taken through the “comprehensive income” statement as AFS reserve moves, they are however now deductible from CET1 capital. The scale of this potential impact is somewhat harder to quantify based off publically available information. In its interim report HSBC flags that the impact of a 100bps on is cash flow hedging reported reserves would be cUS$1.2bn, equivalent to 0.6% of group reported shareholders funds. However it does also state that “These particular exposures form only a part of our overall interest rate exposures” so the full impact is, we believe, likely to be higher. Based of historic disclosures that the group has given we would estimate a sensitivity of the order of a 2-4% drag on reported shareholders funds for every 100bps of yield curve rise.

A final point we would make is FX sensitivity given the meaningful FX moves we have seen in Q4 with the dollar strengthening c5% Vs the Euro, Sterling and RMB in Q4 alone. HSBC’s latest disclosed Structural FX exposures were as of year-end 2015 which suggested “Shareholders equity would decrease by US$2,633mn if Euro and Sterling FX rates weakened by 5% relative to the US dollar. This is equivalent to just under 2% of tangible equity so all things considered it does seem sensible to expect a potential 2-3% drag on tangible equity in Q4 from both the impact of higher rates and a stronger US dollar. It is therefore possible that post buyback that tangible equity at a group level may end 2016 down a couple of % of level as of year end 2015.

Some signs of a volume recovery in HK volumes Volume growth across the US$ and US$ linked block in Asia has been weak over the past 2 years as carry trades with mainland China unwound and general demand for US$ denominated borrowing against the backdrop of a strengthening US dollar remained subdued. In the last few months however HK at least has seen a bottom and at an industry level has shown a slight rebound in credit growth. Given roughly 60% of HBAP’s loan exposure relates to HK this gives some hope that we may at least see mid-single digit loan growth next year. More impressive however has been the recovery in deposit growth in HK that has picked up to now be running at 9-10% yoy, possibly as a result of ongoing capital outflows from the mainland and a desire to hold US$ rather than RMB.

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Banks HSBC Holdings Plc

Figure 4: Credit growth in HK has bottom and recovered Figure 5: HSBC Asia loan book split by geography (H1 slightly in 2017: Now running up c4-5% yoy 16) Assets Loans Loans + BoE 40.0% Others Taiwan 7% 35.0% 3% 30.0% Sing 7% 25.0% Malaysia 4% 20.0% China HK 15.0% 10% 60% 10.0% Indo. 5.0% 1% 0.0% India 3% -5.0% Australia 5% -10.0%

Source: HKMA, Deutsche Bank Source: Company data, Deutsche Bank

Roughly 60% of HBAP’s deposit base in Hong Kong we believe is made up of retail deposits. Coupled with a very high proportion of lower cost current and savings accounts (CASA. c75-80% of the total HBAP deposits) it is this solid funding foundation that gives the business such high leverage to US rates. It also has one of the lowest loan to deposit ratios of any large bank in the world at c56-57% (HSBC in HK is just c48%). This low LDR means that HBAP has a large US$ linked book of securities that we believe have a duration of just 1-2 years and therefore re-price relatively quickly on any upward movement in rates benefiting net interest margin.

Figure 6: HK banking system deposit growth has picked Figure 7: HSBC HK loan to deposit ratios end Q3 16, note up recently to c9-10% yoy 35.0% 120% 30.0% 100% 25.0%

20.0% 80%

15.0% 60% 10.0% 40% 5.0%

0.0% 20% -5.0% 0% -10.0%

Source: Deutsche Bank Source: Deutsche Bank

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Banks HSBC Holdings Plc

Figure 8: HBAP Loan to deposit ratio Figure 9: CASA as % of HBAP deposit base

HK Rest of APAC Total HBAP Savings Current 90.0% 90.0% 80.0% 80.0% 70.0% 70.0% 60.0% 60.0% 50.0% 50.0% 40.0% 40.0% 30.0% 20.0% 30.0% 10.0% 20.0% 0.0% 10.0% 0.0% 2013 2014 2015

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Figure 10: HBAP asset mix (H1 16) Figure 11: HBAP liability split (H1 16)

Cash & Other interbank 12% 10% Other 23% Derivatives 6%

Investments Equity 35% 9% Debt Deposits 0% 64% Loans interbank 37% 4%

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

Differing rate picture around the region… but HIBOR has moved up By historical standards rates around Asia are still very low. But expectations have clearly risen that we have at least bottomed and yields may finally start to rise. As we show in the charts below 3 month HIBOR has moved up to c100bps now largely matching 3 month US$ LIBOR. It is important to stress that the HK banks are most sensitive to the short end of the yield curve rather than the long end (so movement in the US 10 year yield is less important). Historically HK bank NIMs have be quite sensitive to movement in 3 month HIBOR so the upwards move after almost a decade at record lows is a clear positive.

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Banks HSBC Holdings Plc

Figure 12: 3 month HIBOR has moved up to c 1% Figure 13: 3 month HIBOR Vs Hong Kong commercial bank NIMs 1.80 3 month HIBOR (LHS, %) HK banks NIM (RHS, %) 3 Month 1 Year 1.60 7.00 2.40

1.40 6.00 2.20

1.20 5.00 2.00 1.00 4.00 0.80 1.80 3.00 0.60 1.60 2.00 0.40 1.40 0.20 1.00

0.00 0.00 1.20

Source: CEIC, Deutsche Bank Source: HKMA, CEIC, Deutsche Bank

A closer look at HBAPs HK earnings sensitivity to higher rates In the two charts below we show longer term NIM trends for both Hang Seng banks and HBAP HK relative to 3 month HIBOR and also what we have factored in to our HBAP numbers. We have built in HIBOR moving up steadily by another c150bps by YE 2019 which we have modeled in as a c30-35bps improvement in NIM in aggregate over the next 3 years. In the table below we also show an earnings sensitivity based on FY16E for various different levels of NIM expansion. Whilst not an exact science the scale of the PBT sensitivity broadly matches that laid out by the Group’s own NIM sensitivity laid out earlier in this report.

Figure 14: reported NIM Vs HIBOR Figure 15: HBAP HK estimated NIM Vs HIBOR

Average HIBOR NIM Average HIBOR Reported NIM 5.00% 2.70% 9.00% 3.30% 4.50% 2.50% 8.00% 3.10% 4.00% 7.00% 2.90% 3.50% 2.30% 6.00% 3.00% 2.70% 2.10% 5.00% 2.50% 2.50% 1.90% 4.00% 2.00% 2.30% 3.00% 1.50% 1.70% 2.10% 2.00% 1.00% 1.50% 0.50% 1.00% 1.90% 0.00% 1.30% 0.00% 1.70%

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

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Banks HSBC Holdings Plc

Figure 16: HBAP NIM forecast Vs 20 year avg. Figure 17: HBAP risk adjusted NIM Vs 20 year avg.

2.90% 2.60%

2.70% 2.40% 20yr avg is c1.95% 2.20% 2.50% 20yr avg is c2.2% 2.00% 2.30% 1.80% 2.10% 1.60% 1.90% 1.40%

1.70% 1.20%

1.50% 1.00%

Source: Deutsche Bank Source: Deutsche Bank

Figure 18: Simple sensitivity to higher HBAP NIM on FY16E HBAP clean PBT & HSBC Group (US$mn, unless indicated) NIM increase VS FY 16E 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% 0.45% 0.50% Adj FY 16 NIM 1.76% 1.81% 1.86% 1.91% 1.96% 2.01% 2.06% 2.11% 2.16% 2.21% 2.26% 2016E AIEA 717,380 717,380 717,380 717,380 717,380 717,380 717,380 717,380 717,380 717,380 717,380 Implied NII 12,611 12,985 13,343 13,702 14,061 14,419 14,778 15,137 15,495 15,854 16,213 Incremental NII 0 359 717 1,076 1,435 1,793 2,152 2,511 2,870 3,228 3,587 HBAP 2016E clean PBT 13,413 13,413 13,413 13,413 13,413 13,413 13,413 13,413 13,413 13,413 13,413 % increase HBAP 0.0% 2.7% 5.3% 8.0% 10.7% 13.4% 16.0% 18.7% 21.4% 24.1% 26.7% HSBC Group 16E clean PBT 19,991 19,991 19,991 19,991 19,991 19,991 19,991 19,991 19,991 19,991 19,991 % increase Group 0.0% 1.8% 3.6% 5.4% 7.2% 9.0% 10.8% 12.6% 14.4% 16.1% 17.9% Source: Deutsche Bank

In the chart below we show the change in deposit cost of funds for HBAP + Hang Seng Bank relative to moves in 3 month HIBOR over the past 15-20 years. This seems to suggest a “deposit beta” (i.e. Change in deposits cost of funds divided by change in market interest rates) of c70% during the 10 year period leading up to the GFC (1998-2008). This would be broadly consistent with the NIM expansion we have modeled at HBAP for a 150bps HIBOR move.

Figure 19: HBAP + Hang Seng Bank deposit CoF Vs in 3 month HIBOR

HSB + HBAP deposits CoF 3 month HIBOR 9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

Source: Company data, CEIC, Deutsche Bank

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Banks HSBC Holdings Plc

The market has significantly Re-rated HBAP A combination of a weakening volume outlook, ultra low interest rates and a multi-year de-leveraging of HBAP’s balance sheet had led to a consistent de- rating on a price to book basis of HSBC’s Asian operations.

What we believe has happened over the last 3 months is that the market has taken a view that the multi-year period we have seen of ultra loose monetary policy is ended and that rates will now rise. For a “cost of funds” banking franchise such as HBAP this is potentially a very significant turning point for the group P&L. Whilst NIMs will most likely rise as we have discussed above there will be some negative offsets.

For example in our HBAP model we have built in a rise in the loan impairment charge back to a more normalized level. This we expect will be driven by higher NPLs as a result of higher rates but also the introduction of IFRS 9 over the next couple of years. In the chart below we show HBAP’s loan impairment charge expressed as a % of loans over the past 20 years. After a number of years where the charge has been running in the 15-20bps per annum range we can see this rising steadily back towards 45-50bps as rates normalize again.

Figure 20: HBAP loan impairment charge Figure 21: HBAP loan impairment charge split between HK and Rest of Asia Pac 2.00% 4.00% HK Rest of APAC

3.50% 1.50% 20yr average = 45-50bps 3.00%

1.00% 2.50%

2.00% 0.50% 1.50%

1.00% 0.00% 0.50%

-0.50% 0.00% 1997 2000 2003 2006 2009 2012 2015 2018E -0.50%

-1.00% Source: Deutsche Bank Source: Deutsche Bank

The combination of a 30-35bps increase in HBAP NIM, mid-single digit volume growth and a rising impairment charge is sufficient to drive a 150-200bps improvement in HBAP RoE from 13-14% up to 15-16% over the next 3 years. RoEs are however unlikely to ever return to the highs seen 10-15 years ago due to the amount of balance sheet de-leveraging that HBAP has undertaken (i.e. sharp rise in equity/assets ratio and CET1 capital). Our HBAP model does however suggest that RoA could recover back to the c20 year average if rates do move up in with the forecasts laid out in more details above.

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Banks HSBC Holdings Plc

Figure 22: HBAP clean RoE (including & excluding Figure 23: HBAP clean RoA (including & excluding associates) associates) Vs 20 year averages Clean RoTE Clean RoTE ex-associates 1.70% Clean RoA Clean RoA ex-associates 50.0% 20 year average 1.50% clean RoA = 1.3% 40.0% 1.30% 30.0% 1.10% 20.0% 0.90% 20 year average 10.0% cleanRoA ex- 0.70% associates = 1.15% 0.0% 0.50%

Source: Deutsche Bank Source: Deutsche Bank

Figure 24: HBAP tangible equity to assets has more than Figure 25: HBAP’s CET1 capital ratio has increased doubled from its pre-GFC low. sharply in recent years to over 14% 9.0% 45.0% 16.0% 8.0% 40.0% 14.0%

7.0% 35.0% 12.0% 6.0% 30.0% 10.0% 5.0% 25.0% 8.0% 4.0% 20.0% 6.0% 3.0% 15.0% 4.0% 2.0% 10.0% 5.0% 2.0% 1.0% 0.0% 0.0% 0.0% 2010 2011 2012 2013 2014 2015 2016E CET1 Captial ratio RWA/Assets

Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank

A shift in RoE and market perception of this size on the outlook for HBAP has a very significant impact on HSBC group valuation because Asia remains the centre of value creation for the group as a whole.

We illustrate the importance of the contribution from Asia/MENA in the chart below that shows the returns made on the capital allocated to Asia/MENA vs those in the rest of the group. Note in this exercise we have allocated to Asia/MENA a proportional share of the UK bank levy (US$675mn) and group central costs (US$750mn post tax). This lowers the RoE to 11.5-12.0% for FY 16 but reflect the additional cost burdens for those businesses of being part of a global group. Given that on a “clean” basis the group is only expected to make a 7% RoE this year this means that the c50% of group capital that is allocated to the rest of the world is making just a 2-3% return on equity on an underlying basis. This unfortunately is not a one off, it has been a similar story for at least the past 3-4 years despite the ongoing repositioning the group has been undertaking.

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Figure 26: HSBC group equity split (YE 16 Figure 27: HSBC FY16E clean RoE profile Asia/MENA vs the rest of the world

12.0%

10.0%

Asia & MENA 8.0% Rest of Group 51% 49% 6.0%

4.0%

2.0%

0.0% Group Asia/MENA Rest of World Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data

If we move the YE 16 P/B multiple on the Asian franchise from 1.2x to 1.6x to reflect the c200bps improved RoE outlook & re-rating of listed entities such as Hang Seng Bank the implied value of “HBAP” increases by c140-150p Vs the valuation we were using in our August HSBC “Capital Map” report. This coupled with the movement in US$/GBP FX rates since that date could explain most of the recent move in the share price of HSBC at a group level. The market has re-rated the Asian franchise and we believe implicitly factored in c150bps of rate rises into HSBC’s valuation over the next 3 years.

Figure 28: Simple sum-of-the-parts for HSBC’s Asian & MENA operations YE 16E ($mn) Est Equity Est RoE P/B P/E Value US$ Per share HK$ Per share GBP Hong Kong 37,039 15.7% 2.29x 14.6x 84,719 33.23 3.43 - Hang Seng (62.14%) 9,608 13.5% 2.54x 18.8x 24,370 9.56 0.99 - HSBC HK 27,431 16.5% 2.20x 13.4x 60,348 23.67 2.44 BoCom (19.03%) 15,797 12.5% 0.65x 5.2x 10,338 4.06 0.42 Rest of Asia Pac 26,330 10.1% 1.21x 12.0x 31,946 12.53 1.29 Total HSBC Asia 79,167 13.2% 1.60x 12.1x 127,003 49.82 5.14 HSBC Middle East 4,216 13.1% 1.30x 9.9x 5,481 2.15 0.22 SABB (40% stake) 3,267 12.5% 1.07x 8.6x 3,506 1.38 0.14 HSBC Egypt 893 12.6% 1.30x 10.3x 1,161 0.46 0.05 Total MENA 8,376 12.9% 1.21x 9.4x 10,148 3.98 0.41 Total MENA + Asia 87,543 13.2% 1.57x 11.9x 137,152 53.80 5.55 Source: Deutsche Bank estimates

Interestingly a re-rating of this magnitude of Asia (largely driven by HK) means that the equity the group has allocated outside of Asia/MENA may still only be trading implicitly on 0.4x book.

Figure 29: Implied value the market attributes to the equity HSBC has outside of Asia/MEAN is equivalent to just 0.4x book if we rerate HBAP YE 16E (US$mn) Equity Value P/B Asia/MENA 86,582 135,576 1.57x Rest of Group 82,079 32,834 0.40x Group 168,661 168,411 1.00x Source: Deutsche Bank

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4Q16 preview

We forecast US$3.7bn of underlying PBT for 4Q16 – though we are wary that the number of FX movements in the quarter could mean a messy set of numbers on 21 Feb 2017.

Key issues for 4Q16 results & management outlook commentary  Sensitivity to higher rates: we updated disclosures on the sensitivity to rising rates, and questions to management on the speed with what this could come through. As noted in our above analysis, the current disclosures suggests around 100bps = c.15% of additional PBT. But we expect the market to watch management commentary on this area closely on the call.

 TNAV likely to be lower given the meaningful FX moves we have seen in Q4 with the dollar strengthening c5% Vs the Euro, Sterling and RMB in Q4 alone. HSBC’s latest disclosed Structural FX exposures were as of year- end 2015 which suggested “Shareholders equity would decrease by US$2,633mn if Euro and Sterling FX rates weakened by 5% relative to the US dollar. This is equivalent to just under 2% of tangible equity so all things considered it does seem sensible to expect a potential 2-3% drag on tangible equity in Q4 from both the impact of higher rates (negative for AFS) and a stronger US dollar. We have TNAV overall down QoQ at $7.34.

 Further buybacks: having lowered the dividend guidance to 51c flat going forward, but introducing a US$2.5bn buyback at 2Q16 results, we expect HSBC to continue with another buyback in 2017 (likely announced at interims) funded from upstreaming of capital from the US (as indicated at 3Q16). It is our expectation that HSBC will continue with another US$2.5bn buyback in 2017, 2018 and 2019.

 Costs: We forecast underlying costs of US$8.4bn for 4Q16 – a touch higher than consensus. The bigger focus is likely to be on 2017 cost outlook. Note that on the post-results call CFO Iain Mackay said that despite the progress made on costs, HSBC still faced “significant inflationary pressures”. The original plan had expected costs to peak in late 2016 or early 2017 – management now expect it not to peak for another 6- 9 months after that.

 Impairments through the cycle: impairments have been falling, and the rise in commodity prices is likely to dampen credit costs during 4Q16. However, we do expect questions to management on the potential sensitivity of higher rates on impairments.

 European business: given Brexit, we expect that HSBC will likely need to restructure its European business (HSBC Bank plc) out of the UK. The most likely solution is that the UK Ring fence bank will contain the majority of the UK Business, whilst the GBM and Europe-centric businesses are moved into HSBC France which becomes an SSM-regulated entity. It is possible that this restructuring will result in one-off costs, and a potentially separate European entity from the UK altogether.

 US Business: HSBC’s US business is overcapitalized and low returning. Higher rates should help support US bank franchises, however HSBC USA is generally lower-yielding and higher cost than peers at present. We expect questions to the management on the potential strategy for this business.

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4Q16 forecasts vs. consensus

Our 4Q16 forecasts vs. consensus are shown below

Figure 30: DB forecasts vs. expectations

DB estimates Average consensus (Feb 2017) DBe vs Cons (%) DBe vs Cons (US$) 4Q16e 2017e 2018e 2019e 4Q16e 2017e 2018e 4Q16e 2017e 2018e 4Q16e 2017e 2018e NII 7,470 30,070 31,691 33,163 7,161 29,288 30,459 4% 3% 4% 309 782 1,232 Non-interest income 4,969 22,763 23,215 23,877 5,183 22,107 22,858 -4% 3% 2% -214 656 357 Total income 12,439 52,833 54,905 57,040 12,345 51,395 53,317 1% 3% 3% 94 1,438 1,588 Operating costs -9,542 -33,099 -30,238 -29,726 -9,315 -32,745 -30,843 2% 1% -2% -227 -354 605 Pre-provision profit 2,897 19,734 24,668 27,314 3,030 18,650 22,474 -4% 6% 10% -133 1,084 2,194 Impairments -914 -3,769 -4,327 -4,889 -935 -4,008 -4,268 -2% -6% 1% 21 239 -59 Associates 632 2,465 2,411 2,411 590 2,390 2,241 7% 3% 8% 42 75 170 Profit before tax 2,615 18,429 22,752 24,835 2,685 17,034 20,646 -3% 8% 10% -70 1,395 2,106 Tax expense -680 -4,792 -5,915 -6,457 -783 -4,268 -5,133 -13% 12% 15% 103 -524 -782 Profit after tax 1,935 13,638 16,836 18,378 1,902 12,766 15,513 2% 7% 9% 33 872 1,323 Profit attributable to non-controlling -300 -1,087 -1,119 -1,153 -265 -1,048 -1,084 13% 4% 3% -35 -39 -35 Dividends on prefs / capital -295 -1,181 -1,181 -1,181 -226 -1,291 -1,382 31% -9% -15% -69 110 201 Ordinary attributable profit 1,340 11,370 14,536 16,044 1,411 10,427 13,048 -5% 9% 11% -71 943 1,488

Adjusted income statement Revenue 12,439 52,833 54,905 57,040 12,353 51,492 53,316 1% 3% 3% 86 1,341 1,589 Operating expenses -8,442 -29,599 -30,038 -29,726 -8,494 -29,823 -29,741 -1% -1% 1% 52 224 -297 PPP 3,997 23,234 24,868 27,314 3,859 21,669 23,575 4% 7% 5% 138 1,565 1,293 Loan impairments -914 -3,769 -4,327 -4,889 -936 -4,006 -4,268 -2% -6% 1% 22 237 -59 Associates 632 2,465 2,411 2,411 590 2,390 2,241 7% 3% 8% 42 75 170 PBT 3,715 21,929 22,952 24,835 3,515 20,053 21,548 6% 9% 7% 200 1,876 1,404

TNAV 7.34 7.48 7.79 8.01 7.34 7.34 7.48 0% 2% 4% 0.00 0.14 0.31 EPS 0.07 0.58 0.74 0.82 0.08 0.52 0.65 -16% 11% 14% -0.01 0.06 0.09 DPS 0.21 0.51 0.51 0.51 0.21 0.51 0.51 0% 0% 0% 0.00 0.00 0.00 Sharecount 19.78 19.78 19.65 19.51 19.83 19.93 20.13 0% -1% -2% -0.05 -0.15 -0.48

CET1 13.9% 14.2% 14.4% 14.5% 13.8% 14.0% 14.2% Dividend payout 311% 88% 69% 62% 263% 98% 78% C/I ratio 77% 63% 55% 52% 69% 58% 56% Effective tax rate 26% 26% 26% 26% 29% 25% 25% Source: Deutsche Bank estimates, company consensus

Forecast changes

Our forecast changes are shown below. Overall our forecasts rise 5-10% on higher NII offet by higher LLPs in the outer years.

Figure 31: Forecast changes

OLD FORECASTS NEW FORECASTS CHANGES (£m) CHANGES (%) 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e NII 32,531 30,819 29,962 30,224 30,705 32,531 30,415 30,070 31,691 33,163 0 -404 108 1,467 2,458 0% -1% 0% 5% 8% OOI 27,308 20,740 22,108 23,120 23,854 27,308 21,006 22,763 23,215 23,877 0 267 655 95 23 0% 1% 3% 0% 0% Total income 59,839 51,558 52,070 53,344 54,559 59,839 51,421 52,833 54,905 57,040 0 -137 763 1,562 2,482 0% 0% 1% 3% 5% Opex -39,807 -36,891 -33,712 -29,997 -29,428 -39,807 -36,891 -33,099 -30,238 -29,726 0 0 612 -241 -298 0% 0% -2% 1% 1% PPP 20,032 14,667 18,358 23,347 25,130 20,032 14,530 19,734 24,668 27,314 0 -137 1,375 1,321 2,183 0% -1% 7% 6% 9% LLPs -3,721 -3,846 -3,811 -3,751 -3,668 -3,721 -3,846 -3,769 -4,327 -4,889 0 0 42 -576 -1,221 0% 0% -1% 15% 33% Underlying PBT 16,311 10,821 14,547 19,596 21,462 16,311 10,684 15,964 20,341 22,424 0 -137 1,417 745 962 0% -1% 10% 4% 4% Associates 3,014 2,347 2,482 2,482 2,482 2,556 2,484 2,465 2,411 2,411 -458 137 -17 -71 -71 -15% 6% -1% -3% -3% Stated PBT 19,325 13,168 17,029 22,078 23,944 18,867 13,168 18,429 22,752 24,835 -458 0 1,400 674 891 -2% 0% 8% 3% 4% Tax / Minorities / AT1 -6,295 -6,010 -6,895 -8,240 -8,759 -6,295 -6,010 -7,059 -8,216 -8,791 0 0 -164 25 -32 0% 0% 2% 0% 0% Earnings 13,030 7,158 10,134 13,837 15,185 12,572 7,158 11,370 14,536 16,044 -458 0 1,236 699 859 -4% 0% 12% 5% 6% Adjusted earnings 13,551 12,557 12,724 13,985 15,185 13,198 12,557 13,960 14,684 16,044 -353 0 1,236 699 859 -3% 0% 10% 5% 6%

EPS stated (US$c) 66.8 36.3 51.4 70.7 77 64.4 36.3 57.7 74.3 82 -2.3 0.0 6.3 3.6 4.4 -4% 0% 12% 5% 6% EPS adjusted (US$c) 69.4 63.6 64.5 71.4 77 67.6 63.6 70.8 75.0 82 -1.8 0.0 6.3 3.6 4.4 -3% 0% 10% 5% 6% DPS (US$c) 51.0 51.0 51.0 51.0 51 51.0 51.0 51.0 51.0 51 0.0 0.0 0.0 0.0 0.0 0% 0% 0% 0% 0% BVPS (US$c) 873.5 852.6 863.5 893.7 924 873.5 840.0 854.9 886.6 906 0.0 -12.6 -8.6 -7.1 -17.3 0% -1% -1% -1% -2% TBVPS (US$c) 748.5 746.8 756.9 786.4 818 748.5 734.1 748.3 779.3 801 0.0 -12.6 -8.6 -7.1 -17.3 0% -2% -1% -1% -2%

Divisional PBT 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e 2015 2016e 2017e 2018e 2019e RB&WM 5,425 4,186 6,496 7,535 7,932 4,967 4,186 6,947 7,921 8,742 -458 0 451 386 810 -8% 0% 7% 5% 10% Commercial Banking 7,973 7,795 8,607 9,188 9,832 7,973 7,795 8,973 9,493 9,692 0 0 366 305 -141 0% 0% 4% 3% -1% GB&M 7,910 7,782 8,152 8,704 8,954 7,910 7,782 8,734 8,686 9,177 0 0 583 -17 222 0% 0% 7% 0% 2% GPB 344 -311 398 426 421 344 -311 398 426 421 0 0 0 0 0 0% 0% 0% 0% 0% Other -2,327 -6,283 -6,623 -3,775 -3,196 -2,327 -6,283 -6,623 -3,775 -3,196 0 0 0 0 0 0% 0% 0% 0% 0% Total 19,325 13,168 17,029 22,078 23,944 18,867 13,168 18,429 22,752 24,835 -458 0 1,400 674 891 -2% 0% 8% 3% 4% Source: Deutsche Bank estimates, company data

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Valuation and risks

We use two methodologies to value HSBC: Sum-of-the-parts (SoTP, shown below) and Dividend-Discount-Model (DDM); our 12-month target price is the average of the two. For the DDM we use cash dividends and buybacks out to 2019, combined with a terminal valuation based on RoTE in 2019 (10%) and a CoE of 9.5%.

For the SoTP, we use 2018e bank earnings, and then value each business division based on our assessment of appropriate clean P/E multiples. We also apply a conglomerate discount of 10%, and include an NPV of below-the-line items out to 2018, and time value of money to convert our 2018E SOTP to a 12 month target. This gives us a TP of 64HKD up from 56HKD. We retain our hold rating.

Figure 32: SoTP

Ave allocated TNAV Value per Net profit Average RWAs (USD'm) Value share HSBC SOTP (2018E) (2018E) (USD'm 2018E) 2018E P/E P/TNAV (USD'm) (USD) RBWM 5,861 146,265 24,873 12.0x 2.8 70,336 356.8 Commercial Banking 7,025 319,386 54,314 11.0x 1.4 77,277 392.0 GBM 6,428 357,529 60,801 10.5x 1.1 67,493 342.4 GPB 315 18,090 3,076 13.0x 1.3 4,097 20.8 Other -2,645 52,651 8,954 12.0x -3.5 -31,743 -161.0 HSBC Group 16,984 893,920 152,018 11.0 1.2 187,460 950.9 Minus Minorities and hybrids -2,300 11.0x -25,303 -128.4 NPV of non-operating items -148 -4,782 -24.3 Total FV 14,536 152,018 10.8 1.0 157,376 798 Less conglomerate discount 10% -15,738 -79.8 FV net 141,638 718.5 12-month target (USD) 777.8 12-month target (GBp) 622.2 Source: Deutsche Bank estimates, company data

Key upside risks are higher rates, an improvement in Emerging Markets outlook, lower-than-expected loan losses, better-than-expected outcomes for regulation, lower costs, and better than expected distributions / buybacks, weaker sterling (given USD earnings). Key downside risks relate to regulatory change, legacy liabilities, a slowdown in emerging markets, sustained low interest rate environment.

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure HSBC Holdings Plc 0005.HK 67.70 (HKD) 15 Feb 17 1,7,14,15 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0005.HK

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Stephen Andrews

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Historical recommendations and target price: HSBC Holdings Plc (0005.HK) (as of 2/15/2017)

90.00 Previous Recommendations

80.00 Strong Buy 1 2 3 Buy 70.00 Market Perform Underperform 9 10 Not Rated 60.00 8 6 Suspended Rating 45 7 50.00 Current Recommendations

40.00 Buy

Hold Security PriceSecurity 30.00 Sell Not Rated Suspended Rating 20.00 *New Recommendation Structure 10.00 as of September 9,2002 **Analyst is no longer at Deutsche 0.00 Bank

Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16 Aug 16 Nov 16 Date

1. 24/02/2015: Hold, Target Price Change HKD68.00 Jason Napier, 6. 03/05/2016: Hold, Target Price Change HKD50.00 CFA** 2. 19/06/2015: Hold, Target Price Change HKD69.00 David Lock 7. 03/08/2016: Hold, Target Price Change HKD51.30 3. 03/08/2015: Hold, Target Price Change HKD70.00 David Lock 8. 30/08/2016: Hold, Target Price Change HKD53.00 4. 18/02/2016: Hold, Target Price Change HKD55.60 David Lock 9. 25/10/2016: Hold, Target Price Change HKD55.00 5. 22/02/2016: Hold, Target Price Change HKD47.80 David Lock 10. 07/11/2016: Hold, Target Price Change HKD56.00

Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 53 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 37 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 18 % 10 % 100 17 % 19 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research.

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Additional Information

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flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

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Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Banks HSBC Holdings Plc

India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India (SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations.

Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's equity analysts are based on a 12-month forecast period.

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United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

Deutsche Bank AG/Hong Kong Page 19

16 February 2017

Banks HSBC Holdings Plc

by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australian specific research disclosures and related information at https://australia.db.com/australia/content/research-information.html

Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright © 2017 Deutsche Bank AG

Page 20 Deutsche Bank AG/Hong Kong

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Stuart Kirk Head of Research - Germany Head of Thematic Research

International locations

Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Große Gallusstraße 10-14 Filiale Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2EQ New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (1) 212 250 2500