20150529-高盛-June_9_Investor_day__Expecting_a_meaningful_restructuring__CL_Buy_18页_462kb

HSBC Investor Day Summary: Restructuring and Investment Outlook

Core Content

HSBC is set to announce the results of its strategic review at its June 9 investor day. The analysis highlights three key areas of focus: geographic streamlining, investment banking (IB) cuts, and domicile and listing of UK retail ring-fence. The firm's investment case is based on the potential restructuring and expects a "CL Buy" rating.

Main Points

1. Geographic Streamlining

• HSBC is likely to exit or run down its retail operations in select low-profitability markets, particularly in Brazil, Mexico, Turkey, and parts of the US.
• The Americas (especially Latin America) are identified as the primary focus for geographic restructuring due to their low returns (c.2%-5% ROTE) and high cost inefficiencies.
• Latin America stands out with all business lines (except GBM) being loss-making on a fully underlying basis.
• North America also presents a restructuring opportunity due to sub-scale retail and IB operations.
• Asia and UK retail are high-return areas (c.20% and c.30% ROTE respectively), and HSBC is expected to maintain these.
• Retail operations account for 16% of group capital but 43% of total group costs, making them a key area for cost efficiency improvements.

2. Investment Banking (IB) Cuts

• HSBC's IB (GBM) is the lowest-return business, with ROTE of 6%-10%.
• The firm is expected to reduce IB capital usage by c.20%, targeting c.US$120 bn of RWAs.
• The cuts will focus on:
  • Products affected by regulatory changes (e.g., rates, prime services, long-dated derivatives).
  • Geographies and product lines where HSBC lacks scale, such as North America and ECM/M&A.
• Exit costs are estimated to be c.2%-3% of RWAs (c.US$2.4-3.6 bn), with execution likely to take 2-3 years.
• The IB's underlying ROTE is expected to decrease from 10.1% to 6.5% after accounting for balance sheet management revenues and UK bank levy.

3. Domicile and UK Retail Ring-Fence

• HSBC will outline its decision-making framework for the domicile review during the investor day.
• A proposal or decision on domicile is expected within months, not years.
• The financial impact of re-domiciling is limited, with the main benefit being a reduction in the UK bank levy (from c.US$1.5 bn to c.US$0.7 bn).
• There is a possibility of floating part or all of the UK retail ring-fence, but the impact is expected to be limited in the context of the overall group.

Valuation

• The 12-month price target remains at $760p.
• HSBC currently trades at 1.2x trailing P/TB, with a spot mark-to-market of 25% premium.
• The P/BV ratio is 1.0x, and the P/TVB ratio is 1.2x.
• ROE is expected to improve from 10.0% in 2014 to 10.2% in 2017E.
• ROTE is projected to rise from 11.9% in 2014 to 11.7% in 2017E.

Key Risks

• Downside risks include:
  • Macro trends affecting global financial markets.
  • Regulatory changes impacting IB operations.
  • Execution risks in implementing restructuring plans.

Investment Profile

Key Financial Highlights

• Net Interest Income is expected to grow from $34,705.0 mn in 2014 to $39,400.1 mn in 2017E.
• Non-Interest Income is projected to increase from $39,888.0 mn to $47,323.9 mn.
• Total Revenue is forecasted to rise from $74,593.0 mn to $86,724.0 mn.
• Operating Income is expected to increase from $19,999.0 mn to $32,346.4 mn.
• Pretax Profit is projected to grow from $18,680.0 mn to $29,018.4 mn.
• Profit After Tax is expected to rise from $14,705.0 mn to $22,856.0 mn.
• Dividend Payout Ratio is forecasted to decrease from 72.3% to 50.5%.

Conclusion

HSBC is positioned for significant restructuring in the coming months, with a focus on geographic streamlining, IB cuts, and domicile review. These moves are expected to improve cost efficiency, enhance returns, and align the business with its core strengths. The investment case remains positive, with a buy recommendation and a 12-month price target of $760p, despite the associated risks.