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. 16 February 2017 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 Dividend cover(x) 1.7 1.4 1.3 0.7 1.1 1.4 USDm 172,550 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 Private Banking. 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.