HSBC:4Q16preview,Focus on revenues and rate sensitivity

What's changed

HSBC will report 4Q16 results on Tuesday, February 21, at 4.00am (UKT).

Implications

We highlight four key themes ahead of results:

(1) Revenues: underlying revenues have been under pressure over thepast several quarters due to muted loan growth, lower rates and FX(weaker GBP). However, we believe HSBC is likely to see some benefitfrom the more benign IB revenue trends reported by its US peers.

(2) Capital and dividends: we expect the group’s CET1 ratio to remain flatat 13.9% in 4Q16. We do not expect an update this quarter on the scope forcapital upstream from the US: this is dependent on the successful passingof the 2017 US CCAR process (expected late 1H17).

(3) UK mortgages read-across: HSBC further lowered domestic mortgagepricing in the last quarter (see UK Banks: Mortgage monitor – Jan 30,2017), as it continues to increase its gross lending market share. A furtheracceleration in net mortgage growth would provide further evidence thatHSBC is on track to redeploy part of its large excess deposit base(c.￡50 bn, on our estimates) within the future UK ring-fence.

(4) Guidance on rate sensitivity: With an improved market outlook for USinterest rates, we expect HSBC to provide additional guidance around therevenue impact of a higher rate environment. We believe a particular focuswill be on the degree to which the group has structural hedges in place.

Valuation

Our 12M ROTE/COE based price target is 775p, implying 10% upsidepotential. We rate HSBA.L shares Neutral.

Key risks

Upside: Better macro trends, faster rate rises and asset quality.

Downside: Worsening revenue trends or asset quality, higher costs.