HSBC Gets An Upgrade From JPMorgan Despite Brexit-Led Onslaught Of Bank Rating Cuts

JPMorgan has upgraded HSBC Holdings plc (ADR) (NYSE: HSBC) to Neutral from Underweight due to its "defensive" nature post Brexit. The brokerage also downgraded many U.K. and European banks.

Analyst Kian Abouhossein said following the U.K.'s decision to leave the EU, "We see spillover effect to the European banks and cut our EPS estimates on average by 13 percent in 2018E. Our EPS cuts are mainly driven by slower than previously expected GDP growth and more Central Bank easing."

JPMorgan economists believe the Bank of England will look to reduce the BOE base rate to zero. which is negative for NIM and NII for the domestic banks and HSBC. In terms of percentage of group assets in the U.K., HSBC and Bank of Ireland have 36 percent.

Related Link: Post-Brexit Analysis Shows Many ETFs Did Their Jobs

"The implied CoE of 11 percent could increase further, considering the material uncertainty of the UK and EU banking sector, with: i) JPM base case of a slowing EU economy leading to lower rates, ii) B3CET1 ratio declining post EPS cuts, and iii) EU sovereign CDS spreads in Spain and Italy already widening 46bps and 54bps post Brexit," Abouhossein noted.

The analyst, however, cut HSBC's adj EPS estimates by 2 percent, 8 percent and 8 percent for 2016, '17 and '18, respectively, mainly driven by lower Europe earnings due to lower loan growth lower NIM, lower GBM revenues, higher provisions and partly offset by lower costs. The analyst also reduced 2017–18 DPS estimates to 34c and assumes full cash DPS from 2017 onward.

"Therefore, the cash yield of HSBC remains unchanged relative to our previous estimates. Also, as a result of GBP depreciation vs USD, our PT increases to 450p (prev 400p), more than offsetting the EPS cuts. We upgrade our recommendation on the stock to Neutral," Abouhossein noted.

Other Names

The brokerage has cut Lloyds Banking Group PLC (ADR) (NYSE: LYG) to Neutral from Overweight; Barclays PLC (ADR) (NYSE: BCS) to Neutral from Overweight; and Royal Bank of Scotland Group PLC (NYSE: RBS) to Underweight from Neutral.

Among the European investment banks, JPMorgan downgraded Deutsche Bank AG (USA) (NYSE: DB) to Neutral from Overweight; UBS Group AG (USA) (NYSE: UBS) to Underweight from Neutral; and Credit Suisse Group AG (ADR) (NYSE: CS) to Underweight from Neutral.

ADRs of HSBC closed Friday's regular trading session at $30.68. In the pre-market hours on Monday, they were down 5 percent to $29.11 at time of writing.