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European Banks 2 February 2009
HSBC/Standard Chartered
Analysts: Leigh Goodwin/Pawel Uszko leigh.goodwin@fpk.com +44 20 7663 6048
Banking on Asian deposits – upgrading ratings
• We upgrade HSBC from Underperform to In Line. It faces earnings headwinds in almost every region,
particularly Europe (almost half the group’s loan book) from margin pressure, sterling weakness, reduced PPI
income and rising impairments. We envisage 2009e EPS falling 25% to USD0.95 and a 30% dividend cut.
However, assuming such a cut we see no need for any equity raising, the possibility of which has been
weighing on the stock. While it outperformed the European banks sector in 2008, this was largely catching up
2004-07’s underperformance. Moreover, HSBC underperformed its sum of the parts by 12% in 2008 and now
trades at a discount to this of 15-20%..We believe the underperformance has gone far enough and that longterm
valuation fundamentals and an 8% dividend yield (even after a 30% cut) should now support the stock.
• We upgrade Standard Chartered from In Line to Outperform. We believe Standard Chartered was
derated too harshly in 2008. In US dollar terms, Standard Chartered trades at a discount to its sum of the
parts of 40-50%, compared with its historical discount of around 10%. The market simply is not rewarding
the company for its high return businesses and earnings growth prospects in the way that local Asian
markets are prepared to pay for these qualities. In effect, we believe investors in Standard Chartered pick
up its Indian business ‘for free’. We believe that the market is underestimating the resilience of Wholesale
Banking revenues. Dividend growth is safe, the balance sheet affords good visibility and the bank can selffinance
risk-weighted asset (RWA) growth of 15% p.a. even through this downturn.
• Asian exposure the key. We argue that, over time, the valuations of both HSBC and Standard Chartered have
been, and will continue to be, driven much more by their geographic sum of the parts than by the fortunes of the
European sector. We also believe that the Asian banks sector will outperform the US and European banks
sectors. We expect Asian growth to slow sharply this year but we do not foresee a repeat of the banking crisis
of 1997-98. Economies and banks are stronger and households and companies are far less levered.
• Deposits are the new capital. We believe that it is wrong to compare bank financial strength on the basis
of capital ratios alone. Both HSBC and Standard Chartered are ‘long deposits‘ during an era of constrained
liquidity. This gives these banks a significant funding advantage over their US and European peers, which
we believe will persist despite the efforts of central banks to medicate wholesale funding markets.
Table of contents
Investment thesis and overview ............................................................................................................................ 5
Upgrading on valuation fundamentals .............................................................................................................................5
Recommended switch: HSBC to Standard Chartered...................................................................................................10
Asia – the earnings and valuation driver ............................................................................................................ 16
Economic growth ..........................................................................................................................................................16
Trade finance and investment intermediation................................................................................................................17
Retail banking product penetration still low ...................................................................................................................22
Asian credit quality concern for 2009-10 but no repeat of 1997-98.................................................................. 24
Asset/property values correcting ..................................................................................................................................24
Commercial real estate the main concern .....................................................................................................................24
Residential mortgage exposure less of a concern.........................................................................................................26
Asian economies in much better shape than 1997-98 ..................................................................................................27
As are Asian banking systems .....................................................................................................................................28
Asian presence provides a key funding advantage........................................................................................... 33
Deposits are the new capital ........................................................................................................................................33
Asian presence a key liquidity differentiator ..................................................................................................................33
Western banking systems face liquidity constraints ......................................................................................................35
Risk that falling rates put pressure on NIM....................................................................................................................38
HSBC – upgrading to In Line, price target GBP6.20 .......................................................................................... 40
Valuation.......................................................................................................................................................................40
Recent trading – headwinds gathering ..........................................................................................................................44
HSBC Finance Corporation credit trends ......................................................................................................................45
European PFS – losses ahead.....................................................................................................................................47
European Commercial Banking....................................................................................................................................51
The Asian opportunity...................................................................................................................................................52
Financial forecasts........................................................................................................................................................55
Standard Chartered – upgrading to Outperform, target GBP14.50 .................................................................. 56
Valuation.......................................................................................................................................................................56
Keeping up the pace.....................................................................................................................................................62
How sustainable is Wholesale Banking growth?...........................................................................................................65
Capital – GBP1.8bn is enough .....................................................................................................................................68
Financial forecasts........................................................................................................................................................71
Appendix: Geographic earnings breakdowns.................................................................................................... 74
HSBC geographic breakdown ......................................................................................................................................74
Standard Chartered geographic breakdown..................................................................................................................75
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