JPMorgan downgrades HSBC to 'underweight', cuts target
By Iain Gilbert
Date: Wednesday 20 Feb 2019
(Sharecast News) - Analysts at JPMorgan downgraded global banking giant HSBC to 'underweight' from 'neutral' on Wednesday, noting the troubled outlook for revenue growth might weigh on prospects for the lender's return on tangible equity for longer than previously thought.
JPMorgan cut it's already below company consensus earnings per share forecasts on HSBC for 2019 and 2020 by a further 3-5% as it stripped the shares of their 'neutral' rating and cut its target price from 690p to 620p.
"Although we rate HSBC's management highly and view the group on the right strategic path long term, we believe that revenue growth pressures, alongside cost investment needs, could weigh on the ROTE outlook for longer than we previously thought," JPM's analysts said.
JPMorgan said it no longer sees the 11% ROTE forecast by HSBC as being achievable in 2020 based on normalised impairments and also noted that, against that, the premium valuation of HSBC's shares at 1.2x P/TNAV for 10% RoNAV was exposed to "rising downside risk".
"We continue to expect that HSBC's 51c dividend will remain stable over the medium term, but the 6% yield could move higher in our view with the market awaiting clarity over B4 impact and UK mortgage RWA inflation," said the broker.
In contrast, JPM highlighted that a number of other British and European banks offered "attractive and growing capital returns in 2019/2020" with an average dividend yield of 5.5% for the sector and higher dividend growth potential.
"HSBC's weak Q4'18 results are a negative read-across for StanChart but we see valuation at 0.6x P/TNAV as more reflective of the revenue and ROE pressures at StanChart which has more recovery potential over the medium term."
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