Key Segments

Retail Banking and Wealth Management (RBWM): This segment offers personal banking products and services, home loans and advances, insurance and investment products, credit cards, international services, savings products, and wealth solutions and financial planning services, just as an Internet, mobile banking and telephone services.
Commercial Banking (CMB): CMB segment includes working capital, term credits, payment services and worldwide exchange facilitation just as mastery in mergers and acquisitions, and access to financial markets.
Global Banking and Markets (GB&M): GB&M segment supports the government, corporate and institutional customers over the world.
Global Private Banking (GPB): GPB segment gives private banking, and speculation and wealth and investment management solution to entrepreneurs, business people, and senior employee and their families.

Key Management

Mark E Tucker (Group Chairman)
John M Flint (Group Chief Executive)
Ewen Stevenson (Group Chief Financial Officer)
 

Key Statistics


(Source: Financial Times)

Key Financials – FY 2018 ($ million)


(Source: Annual Report, Company Website)

Financial Commentary

The group’s revenue in the financial year 2018 increased to $53,780 million against $51,445 million reported last year (FY 2017). With strong performance reported in all the business segments, revenue metric surged by 4.5 per cent. In FY 2018, Operating Profit surged by 17.3 per cent to $17,354 million as compared to $14,792 million reported last year. In 2018, reported Profit of the year was up by 26.5% to $15,025 million against $11,879 million reported last year, due to a surge in the income generated from Bank of Communication Company Limited (BoCom) and reduction in the taxes.Reported Basic EPS rose by 31.3 per cent in FY18 to 0.63p, reflecting higher operating profit and a lower tax rate. In 2018, reported total assets surged by $36,353 million to $2,558,124 million against $2,521,771 million reported last year, due to asset growth in the Asia region. Shareholders equity reported in FY18 reduced by $3,997 million to $186,253 million as compared to the last year data.
 

Financial Ratios


(Source: TR)

Ratios Commentary

The reported net interest margin in FY2018 increased by 0.03 per cent to 1.66 per cent against 1.63 per cent reported last year.Operating leverage of 4.4% for FY18 stood considerably higher than the industry median of 0.5 per cent. In FY18, Loan growth stood at 1.9% which was remarkably lower than the industry median of 4.9%.The company’s reported deposit growth of negative 4.0% in 2018 stood below the industry median. As compared to the previous year, deposit growth has decreased significantly in FY18. On financial leverage front, the asset-equity ratio was higher as compared to the industry median.Pre-tax Return on Equity (ROE) stood at 10.6 per cent which was higher than the industry median of 9.7 per cent.
 

Recent News

On 14th January 2019, HSBC has settled more than three million Foreign exchange transactions and made over 150,000 payments worth USD 250 billion using DLT (distributed ledger technology).
 
Share Price Commentary


(Source: TR)

On 6^th March 2019, at the time of writing (before market close), HSBC shares were trading at GBX 625.5, up by 0.337 per cent against its previous day closing price.Stock's 52 weeks High and Low is GBX 749.90 /GBX 596.40. At the time of writing, the share was trading 16.87 per cent lower than its 52w High and 4.53 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 25,694,927.40; 30 days - 21,386,130.07 and 90 days - 21,296,278.83. The average traded volume for 5 days was up by 20.15 per cent as compared to 30 days average traded volume.On the valuation front, the stock was trading at a trailing twelve months PE multiple of 11.0x as compared to the industry median of 9.4x. Total outstanding market capitalisation was around £125.10 billion. The company’s stock beta was 0.98, reflecting the same directional movement as compared to the benchmark index.On the dividend front, the dividend yield for HSBC stood at 6.34 per cent at the time of writing (as at Mar-06-19).

Growth Prospects and Risks Assessment

The company has delivered strong revenue growth in FY18 with an increase in the customer base and capital efficiency.The company is planning for the UK’s take-off from the EU to provide continuity for all the clients in the UK and Europe. The company will stay alert to the downside risks to safeguard shareholders interest particularly those identifying with the UK economy, global exchange tensions and the future way of loan costs.The company will be proactive in overseeing expenses and investments to meet the risks to income development and won’t take short term decisions that would affect the long-term interests of the business and shareholders.
 

Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)

While valuing HSBC Group on NTM Peers Price to Earnings, we have considered its peers like Standard Chartered PLC (NTM P/E was 10.34x), AIB Group PLC (NTM P/E was 12.18x), Metro bank PLC (NTM P/E was 13.38x), and Close Brothers Group PLC (NTM P/E was 10.9x). The median of Price/Earnings (NTM) of the company’s peers was 12.0x.


Method 2: Price/Book Value Multiple Approach (NTM) (Book Value Per Share (FY19E approx.))

To compare HSBC Group with its peers, Price to Book Value has been used. The peers are Lloyds Banking Group PLC (NTM P/B was 0.98x), Royal Bank of Scotland Group PLC (NTM P/B was 0.76x), CYBG (NTM P/B was 0.63x), OneSaving Bank PLC (NTM P/B was 1.59x), and AIB Group PLC (NTM P/B was 0.81x). The average of Price/Book Value (NTM) of the company’s peers was 0.954x.  

(Note: All forecasted figures and peers have been taken from Thomson Reuters. All USD figures have been converted into GBP; USD: GBP - 0.76)

Conclusion

With broad-based challenges which can be seen ahead of the group with Brexit uncertainties, trade tensions between the United States and China and the forward interest rates path uncertainty, the company has to remain alert and pursue proactive approach in managing cost base. With diversified business initiatives, strong customer base and favourable long-term revenue drivers, we have given a BUY recommendation from the previous day closing price of GBX 623.4 (as on 5^th March 2019)  with single-digit upside potential based on 12.0x NTM Price/Earnings on FY19E earnings per share and 0.954x NTM Price/Book Value on FY19E Book Value per share.

*The buy recommendation is valid for the current price as covered in the report as on (6th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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