HSBC Shares Higher Following Addition To Goldman's Conviction Buy List

In a report published Monday, Goldman Sachs analysts added HSBC Holdings plc (NYSE: HSBC) to the Conviction List, from the prior Buy rating."Bank sector rationalisation has begun, driven by a single aim: to improve (low) returns. However, the pursuit of higher ROE is being implemented through two opposing strategies, shrinkage (for big banks) and consolidation (for small and mid- sized banks)," the analysts wrote. With regulations in the European banking sector reducing benefits of scale, maintaining a large size has become a capital and P&L cost. With this, the region's "mega" banks have taken initiatives to shrink. "Ultimately, we expect streamlining / exits from select geographies (via sales, spin-offs) and/or business lines (shrinkage)," the analysts said.On the other hand, mid- and small-banks, the Single Supervisory Mechanism (SSM) provides a framework, and incentive, for consolidation. The process of consolidation is yet to begin in full steam.In the report Goldman Sachs noted, "The ROE outlook for the European banks remains poor in our view: margins, impacted by monetary policy, are declining; the standalone cost-cutting opportunity has diminished; and provisioning leverage has played out. To improve returns, we believe strategic rather than operational improvements are required. We see both trends (the shrinkage of large banks and consolidation of small banks) leading to such an ROE improvement.""Among the "big" banks, HSBC's shares have most to gain from a strategic streamlining, in our view," the analysts added. Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA) has been removed from the Conviction List and its rating has been downgraded to Neutral. Goldman Sachs has also upgraded Bank of Ireland (OTC: IREBY) to Neutral from Sell.