HSBC Holdings:Above expectations,better capital position,positive jaws;Buy

What surprised us.

HSBC reported 3Q underlying PBT 10% ahead of company-compiledconsensus, led by better operational as well as credit costs. The PBT wasin line with GSe (-2%) on a slightly weaker top-line partly offset by lowercredit costs. Retail Banking & Wealth Management (driven by higherwealth income) and Global Banking & Markets (on higher FICC income)showed better than expected profitability trends while ‘Other’ (higherinterest cost on TLAC debt) missed. By far the biggest positive and thefocal point for the announcement would be a CT1 CAR of 13.9%,which was markedly better than expectations, as PRA changedthe regulatory treatment of the stake in BoCom resulting in a104bp improvement. Jaws were 5.6pp positive for the quarter –second consecutive quarter of positive jaws – and 1.5pp for 9M16.

The effect of higher LIBOR/HIBOR was seen in 9M16 income through widerdeposit spreads with: (1) Global Liquidity & Cash Management income up6% vs. a 4% rise in average deposits, and (2) Deposit income within RBWMup 8% vs. a 2% rise in average deposits. That said, overall NIM fell on FXtranslation, sale of Brazilian business and pressure on lending spreads(esp. in UK), slightly offset by lower costs of funds in Asia.

What to do with the stock.

Affirm Buy. We expect a positive share price reaction. We changeunderlying 2016E/17E/18E EPS by -5%/+1%/+1% and raise 12m RIM-basedTP to HK$65 (0.98X 2017E P/B, from HK$62) on higher medium-term ROEexpectations as we raise balance sheet leverage on account of a muchbetter current capital position. Key risks: Higher-than-expected UK creditcosts and/or capital requirements; higher operational costs in Europe.