HSBC:Making a statement

HSBC’s 2Q16result was weaker than expected on both an underlying andreported basis. We trim 16-18CL NPAT by 2-9% and hold 16-18CLdividend at US$0.51per share. HSBC abandoned the timing of 10%+ ROEdelivery but softened the blow by announcing a share buyback. Given thestock’s resilience post-Brexit and its underwhelming earnings/ROEoutlook during our forecast time horizon, we reiterate our Underperformrecommendation with a revised HK$47.75(from HK$48) target price.

Below expectation

2Q16PBT of US$3.6bn was down 41% QoQ and 45% YoY. This was materiallybelow our expectation of US$6.5bn. The miss was driven by weak revenues,one-off costs/impairments and higher bad debts in Latam/commodities. The2Q16DPS was in line with expectation at US$0.10but a US$2.5bn buybackwas announced. The 1H16ROE was 7.4%.

Lack of momentum ex-capital

Both customer advances and deposits fell on a reported basis in 1H16. On aconstant currency basis, loans fell 1.5% driven by Asia and run-off/sales oflegacy portfolios in the US while deposits grew by 2.6%. The LDR is 68.8%.The gross NPL ratio fell to 2.4% (2H15: 2.5%) driven mainly by the runoff/sales of legacy portfolios in the US. The coverage ratio is 40.8% (2H15:

40.3%). The end point CET1advanced by 20bps to 12.1%. The leverage ratiois 5.1%. BVPS was negatively impacted by FX and other moves, which kept itbroadly stable to 2H15at US$8.75.

Reducing 17-18CL NPAT by 5-9%

HSBC has retained its 10%+ ROE target but removed the timeline of delivery(previously 2017). It has also altered its dividend policy from progressive tosustaining the dividend at current levels for the foreseeable future. Theoperating environment remains difficult and this will likely weigh on revenuegeneration and asset quality. We cut 16-18CL NPAT by 2%-9% per annum toreflect this. The incorporation of a US$2.5bn share buyback in 2H16narrowsthe EPS impact to 0-8%. Our 16-18CL DPS remains flat to 2015at US$0.51per share.

Reiterate Underperform with a revised target price of HK$47.75

We value HSBC on a target PB multiple derived using the Gordon GrowthModel, which is based upon underlying ROE of 8.7%, COE of 10.4% andterminal growth rate of 4%, for a target multiple of 0.7x. We apply this to17CL BVPS of US$8.51, adjusted for an impairment on its stake in Bocom. Weretain our U-PF recommendation, but revise our target price from HK$48toHK$47.75to reflect the reduction in BVPS.