Analysts Upgrade HSBC on Back of Sterling Slump

Following the Brexit vote, there are several fairly immediate considerations for banks and analysts think that HSBC will also be hit by slowing growth in emerging markets

Stephen Ellis 13 July, 2016 | 1:07PM
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As we update our exchange rate, we are increasing our fair value estimate to £6.10 from £5.60. We expect HSBC's revenue to fall 8% in 2016 and to grow at a compound annual rate of 4% in the medium term on growth in Asia and Latin America and the improvement of the interest rate environment.

While the impact of Brexit is far reaching, we do see an undervalued opportunity with HSBC

We think that falling commodity prices and slowing growth in emerging markets will mean a rise in credit costs in 2016 and we are penciling in $1.5 billion of additional regulatory fines. Using these assumptions, we estimate a fair value of $8 per common share for HSBC, which reports in U.S. dollars. We use an exchange rate of $1.31 per £1 as of July 12.

HSBC’s (HSBA) narrow moat is built on its nearly unparalleled global network, whose geography covers 90% of global trade and capital flows, with approximately 40% of its revenue coming from firms operating in two or more markets and other institutional clients. We think this gives HSBC the reach and scale necessary to serve international corporate clients in a way few other firms can rival.

Following the Brexit vote, there are several fairly immediate considerations for banks. We would expect to see higher funding costs for U.K. banks, sharply lower loan growth, as we expect anywhere between a 3%-6% impact to U.K. GDP, and a significant drop-off – potentially 40%-50% – in investment banking fees. Asset management and trading operations will be impacted by the stock, bond, and currency volatility, and we expect trading losses as well as lower asset management fees.

Over the longer term, we also see largely negative impacts. We would expect a lower level of normalised GDP growth for the U.K., as it has been one of the strongest beneficiaries of GDP growth in the EU since it was formed. We also believe the reorganizations that will take place at many U.K. banks will lower the overall importance of London as a key financial center, making it harder for banks to compete for talent and the relationships that drive fee income and help retain deposits. 

While the impact of Brexit is far reaching, we do see an undervalued opportunity with HSBC, primarily due to its relative lack of U.K. exposure and its pivot toward Asia.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.