Monday, 2 November 2015

HSBC - conference call insights

Something for everyone in today's HSBC conference call following the publication of their third quarter results.  Many of the resulting press headlines will be centred on continuing domicile discussions (with indications in the report that the decision may now not be taken until 2016).

Results were blighted by poor revenue trends reflecting some difficult market conditions in Asia due to the Chinese stock market correction...

...but also the cost of regulation and inflation in the business (confirmed by management as mostly wage inflation): 

The net impact of all this?  The company missed its positive jaws target (i.e. costs ran ahead of revenues despite hopes for the opposite): 

Note however the progress on headline return on average shareholder equity / return on average tangible equity....although other measures such as return on risk weighted assets struggled with various 'adjustments'.  

So all eyes then on the turnaround targets.  Note the updated table below...additionally management noted on the call that:

'much more to achieve on costs' 

'expect to see results in the coming quarters' 

'cannot guarantee linearity against the targets...but do not also assume we have just (initially) picked up the low hanging fruit' 

Given the lack of 'positive jaws' noted above this becomes all critical.  

Other observations during the conference call included: 

'when we look across overall asset quality...quality remains very stable' 

Capital position - 'pro-forma Brazilian business sale takes us into the middle of the 12-13% tier 1 range...feel comfortable' given global backdrop, uncertainty etc.  

'trying to run the business with an RoE of 10% with a CT1 of 13%'

The first comment may surprise some re Asia, meanwhile the latter comment is also noteworthy. I have already noted RoE trends in this piece and mating this with underlying net asset value per share indicates (as you would expect) theoretical value even before consideration of the 7% dividend yield (interestingly on which there was no questions about during the conference call).

With net assets per share of US$9 (or c. 585p per share), a 10%+ RoE would suggest fair value in the 585-650p range versus the prevailing 500p share price hit by Chinese fears and related over the last few months:

 So something for everyone in the numbers: yield, theoretical value, China impacting short-term numbers, cost cutting scope.  Of course execution is the challenge but my instinct is that the combination of the above factors still highlights very good value in HSBC shares - to be honest however you could have said that for much of the last few months.  

My view today however - on balance - would be buy/add to positions.  

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