HSBC:The Neverending Story

HSBC likely to be hit by further one-off provisions

The FCA has proposed a June 2019 deadline for PPI mis-selling claims inthe UK. This is 12 months longer than expected and could result in anadditional US$419m of claims. We adjust 16-18CL NPAT by a cumulativeUS$2.1bn to incorporate additional PPI claims and other potentiallitigation/customer redress costs. We reiterate our U-PF recommendationwith a revised HK$48.00 target price (previously HK$48.30).

FCA proposes mid-2019 deadline for PPI miss-selling claims

The Financial Conduct Authority (FCA) has released CP16/20. In thisdocument, the deadline by which UK consumers need to make their paymentprotection insurance (PPI) complaints or forfeit their right to them is June2019. HSBC’s PPI provisions to date have been made assuming a June 2018deadline. We estimate that HSBC may need to take an additional US$419m ofprovisions in addition to the US$4.8bn of PPI provisions in order to coverpotential complaints received between June 2018 and June 2019.

One of many legacy issues outstanding

HSBC still faces investigations and litigation with respect to Madoff, USmortgages, US mortgage securitisation, anti-money laundering, tax (eg, taxevasion/tax fraud), manipulation of benchmark rates, FX, precious metals,CDS, FIFA, consumer enhancement products in the US and hiring practices.

Further provisions may also be required for the UK Consumer Credit Act. Weestimate that these issues may result in a further US$1.8bn of provisions.

Cutting 16-18CL NPAT by 4-5%

Resolutions/settlements in 1H16 has consumed majority of our 2016 P&Lprovisions for legacy issues. We revise 16-18CL NPAT by 4-5% per annum toincorporate additional provisions for: i) PPI, ii) other customer redress, iii)hiring practices, iv) Madoff-related litigation, v) metals litigation, and vi)other. By our calculations, the additional US$2.1bn in cumulative provisionsbeing added to our forecasts will take total provisioning between 2011 and2018 to US$16.6bn for legacy issues.

Retain U-PF recommendation with a revised HK$48.00 target price

We value HSBC on a target PB multiple, derived using the Gordon GrowthModel, which is based upon an ROE of 8.7%, COE of 10.6% and terminalgrowth rate of 4%, for a target multiple of 0.7x. We apply this to 17CL BVPSadjusted for an impairment on the carrying value of its associate BoCom. Weretain our U-PF recommendation with a revised HK$48.00 (previouslyHK$48.30) target price. HSBC will report its 1H16 result on 3 August.