Revenge of jaws:Lower revenues held back performance-adjusted PBT

HSBC’s 3Q15 result missed expectations on an adjusted basis largely onthe back of revenue weakness. The challenging revenue environment hasresulted in management acknowledging that positive jaws in 15CL willnot be achieved. On the back of this result, we adjust our 15-17CL by -5%to 1%. We retain our O-PF rating with a revised HK$64.35 target price(from HK$66.50).

P&L: Revenue weakness drives negative jaws and adjusted miss

3Q15 attributable NPAT of US$4.85bn was up 17% QoQ and 47% YoY, taking9M15 NPAT to US$14.04bn; however, this was helped by one-off items.

Underlying 3Q15 PBT was down 10% QoQ and 14% YoY. Adjusted revenueswere negatively impacted by headwinds in the GBM (rates, credit, FX), wealthinsurance manufacturing) and private banking businesses and this drove theC/I ratio to 61% in 3Q15. On the back of this, 9M15 jaws (revenue growth vsexpense growth) widened to -4.1%. Bad debts as a % of loans declined to27bps. The third interim dividend was US$0.10 (2Q14: US$0.10).

B/S: Loan book shrinking, asset quality holding, capital improving

YTD loan growth is -5.1% while YTD deposit growth is -3%. This includes thereclassification of Brazil to held-for-sale in 1H15. The loan-to-deposit ratiowas broadly stable at 71%. The bank is seeing limited deterioration across itsloan portfolio. CET1 benefitted from profit, RWA initiatives and FX. The CET1ratio was 11.8% (1H15: 11.6%). BVPS declined from US$9.11 to US$9.00.

15-17CL EPS adjusted by -5% to +1%; no change to DPS

Management acknowledged based on adjusted 9M15 performance, the bankwill not achieve positive jaws in 2015. The revenue environment remainschallenging, although the bank is very focused on delivering against the 9strategic priorities that were announced at its investor day in June, whichincludes significant cost cutting. RWA reduction is the main source of progressagainst these priorities thus far. Our revised numbers reflect 3Q15performance, lower adjusted performance in 4Q15 and higher costs forminority interest and other equity instruments. There is a 1% increase to15CL NPAT and a 3-5% decrease to 16CL-17CL. No change to DPS.

Reiterate O-PF with a revised HK$64.35 target price

We value HSBC on a target P/B multiple, derived using the Gordon GrowthModel, which is based upon sustainable ROE of 10%, COE of 10.5% andterminal growth rate of 4%, for a target multiple of 0.9x. We apply this to16CL BVPS of US$9.25. We retain our O-PF recommendation but revise ourtarget price from HK$66.50 to HK$64.35 to reflect our NPAT changes.