HSBC:Red,HSBC reported an unexpected loss in 4Q15

HSBC’s 4Q15 result was weaker than expected on both an underlying andreported basis. We trim our 16-17CL NPAT by 7% and hold the 16-17CLdividend at US$0.51 per share. Given the stock’s de-rating, underlyingROE expectations and the yield which should be supported by continuedstrategic action, we reiterate our O-PF recommendation with a revisedHK$52 (from HK$56) target price.

Loss-making in 4Q15

4Q15 reported a loss of US$1.3bn in 4Q15 driven by i) one-offs (eg,US$773m loss on own credit spread, US$186m loss on DVA, US$707m inlitigation/customer redress, US$288m loss on disposals); ii) underlyingrevenue weakness iii) higher credit costs (several geographies; energysector) and iv) lower associate income. Cost control was the lone positive.

The final dividend was in line with market expectation of US$0.21. Guidancefor 1Q16 DPS is US$0.10.

Mixed balance sheet performance

Both customer advances and deposits fell on a reported basis. However,underlying YoY loan growth was 4% in 2015, driven by Europe, North Americaand Asia. Underlying deposit growth was 3%, mainly driven by Asia. The LDRis 71.7%. The gross NPL ratio fell to 2.6% (2H14: 3.0%) driven by relativelybroad-based improvements. The coverage ratio is 40% (2H14: 42%). Theend point CET1 advanced by 10bps to 11.9%. The leverage ratio is 5%. BVPSwas negatively impacted by FX and AFS moves and declined to US$8.73.

2016 will be a challenging year

The weak end to 2015 is a prelude for 2016. The operating environmentremains difficult and this will weigh on revenue generation. Positive jaws areunlikely to be achieved until 2017; however, we remain hopeful that BVPS willprogress. We cut our 16-17CL NPAT by 7% per annum to reflect softerrevenue momentum (margins, fee income and other income), lower associateincome and higher exceptionals. Offsetting some of this downward pressureare tighter cost control and slightly better asset quality performance in 16-17CL. Our 16CL-18CL DPS is flat to 2015 at US$0.51 per share.

Reiterate Outperform

We value HSBC on a target PB multiple derived using the Gordon GrowthModel which is based upon underlying ROE of 9.1%, COE of 10.6% andterminal growth rate of 4%, for a target multiple of 0.8x. We apply this to16CL BVPS of US$8.88 adjusted for an impairment on its stake in Bocom. Weretain our O-PF recommendation, but revise our target price from HK$56 toHK$52 to reflect our NPAT changes.