HSBC Cut To Sell-Equivalent At BoA: Are Regulations Killing Investors?

Alastair Ryan of Bank of America Merrill Lynch downgraded the rating on HSBC Holdings plc (ADR) HSBC from Neutral to Underperform, while lowering the price target from 480.00p to 450.00p.

Estimates Lowered

Ryan explained that the earnings estimates for the company had been lowered by 5 percent due to “weaker trading income; a poor near-term outlook for wealth management sales in Asia; and on the step down in global rates following cuts by the Bank of Japan, ECB and other European central banks.”

The analyst now expects reported dividend payout ratio of almost 100 percent for 2016, with the company paying a stable dividend in 2016, driven by RWA reductions and the sales of its Brazil operations, which have helped generate capital.

However, Ryan expressed concern regarding 2017, while mentioning that in the absence of any meaningful rate hikes, the earnings expectations could continue to fall.

Regulatory Concerns

According to the Bank of America report, “Elevated regulatory capital demands leave much of HSBC making poor returns: we estimate 6 percent in transaction banking and a similar level on excess deposits.”

In order to increase returns on capital with its business lines, the company has had to restructure itself, which has led to a reduction in the total earnings. Ryan believes there could be further declines going forward.

“HSBC is a low-risk bank, built on what were capital-free deposits. Regulation has made its risks consume double historical capital – and deposits considerably more,” the analyst added.