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FTSE slips but HSBC climbs on break-up talk

Discussion in 'Market News' started by Lily, Aug 31, 2016.

  1. Lily

    Lily Forum Member

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    Analysts say case for HSBC breakup has rarely been stronger

    Leading shares are edging lower on the day but still look like posting a more than 1% gain for the month.

    Banks are among the main gainers, boosted by a number of positive economic signals from the UK despite the Brexit vote, the latest being consumer confidence figures.

    The announcement of a $2.5bn share buyback at HSBC’s interim results surprised market consensus that had been factoring in the prospect of a dividend cut. In this report we lay out a “Capital Map” for the HSBC Group that shows clearly where the group allocates capital geographically, what the returns generated on that capital are & what the cash dividend paying capability is of each operating company up to the group. This we believe not only helps shed greater light on the sustainability of group dividend but illuminates the areas where the group still has large sums of capital allocated inefficiently.

    We believe our “Capital map” exercise also sheds greater light on the cost of “being HSBC”. Our analysis identifies two clear costs: 1) capital trapped in subsidiaries making sub-cost of equity returns but viewed as essential to generating group-wide synergies (e.g. GBM in the US); 2) the cost of group centre (we estimate this alone is around 2-3% drag on group return on equity). At present we believe there is little compelling evidence that the benefits of running a global HSBC are outweighing these costs. Whilst this remains the case it is hard to see HSBC’s shares out-perform peers with cleaner and less complex business models.

    [The] outlook remains cautious and we reduce our December 2016 profit before tax from £13.0m to £9m (cons £11m) to give earnings per share of 4.6p from 6.7p. We assume progress remains challenged in 2017 and reduce our December 2017 profit before tax from £21.8m to £12.0m to give earnings per share of 6.2p from 11.0p. Despite clear strategic progress, these material downgrades (after a poor 2015) are likely to leave investors slightly nervous.

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