Morgan Stanley Downgrades HSBC To Underweight

• Shares of HSBC Holdings plc (ADR) HSBC have declined 29.21 percent over the past one year, to a low of $33.33 on February 5.
• Morgan Stanley’s Chris Manners has downgraded the rating on the company from Equal-weight to Underweight, while lowering the price target from 545.00p to 480.00p.
• Manners expects the company to report disappointing earnings, driven by weaker revenues, along with increasing risk to the dividends with the headline payout ratio getting closer to 100 percent.

Analyst Chris Manners stated, “With a headline divi yield of 7.5 percent, investors have gravitated to HSBC in a tough market, as US rate hikes offered margin upside and cost discipline is being shown.”

However, Manners expressed increased caution on revenues and Bank of Communications’ earnings, and therefore HSBC’s dividends, explaining that investors are clearly questioning the Bank of Communications’ earnings sustainability.

With the market value of HSBC’s stake in Bank of Communications at $8 billion, as compared to the carrying value of $15 billion, Manners believes that there could be increasing risk of the non-cash income of the latter company being derecognized.

According to the Morgan Stanley report, the consensus revenue expectations, especially for Hong Kong, could prove too high.

“After c.13 percent loan CAGR over last 10 years in HK, driven by low US rates and high Chinese growth, we expect a moderation to c2 percent over the next few years,” the report said.

In addition, the conduct charges and restructuring costs expected over the next three years could lower capital accretion for HSBC.