Deutsche Bank Markets Research

Deutsche Bank Markets Research

Rating Company

Date

Buy

Asia

HSBC Holdings Plc

13 December 2012

Pan-Asia

Banking / Finance

Recommendation Change

Price at 13 Dec 2012 (HKD) Price target - 12mth (HKD) 80.25 90.00 80.25 - 55.09 22,503 52-week range (HKD) HANG SENG INDEX

Banks

Reuters 0005.HK

Bloomberg 5 HK

Exchange Ticker HKG 0005

Being more boring - In a good way; upgrading on better growth outlook

Hinging on a US recovery, helped by better outlook in Asia We expect HSBC’s underlying earnings to be driven by the recovery in the US and an improving outlook in Asia. Putting aside the risk of the US Fiscal Cliff, data out of the US points to an improving US housing market – a source of pain for HSBC’s run-off mortgage portfolio of US$44bn which has taken cumulative losses of 30% so far. Though the speed of housing recovery is modest, we expect HSBC to show better progress in this non-core book through customer deleveraging and asset sales. As a result, we follow our UK banks analyst Jason Napier in upgrading HSBC from Hold to Buy with a raised target price of HK$90 (from HK$80). Preparing for further cost cutting in May strategy day In May 2011 HSBC unveiled plans to make cost saves of US$2.5-3.5bn by end of 2013 with a cost/income ratio of 48-52%. Management now expect to exceed the US$3.5bn target in 2013 though costs are up since 2011, and the cost/income ratio is well outside the target range. Part of this is down to revenues having disappointed relative to plan we believe, compounded by the sale of profitable businesses such as US credit cards. But we expect some costs outside of the original plan have also risen including in compliance. The result is that we expect a renewed focus on costs at the May 2013 strategy, with further emphasis on simplifying the group and its functions. As the biggest division, RBWM is likely to take the bulk of these cuts. Safety and Security HSBC serves as a ‘safe haven’ stock for some, given strong...