Streamlined Operations And Asia Expansion Will Strengthen Future Prospects

Key Takeaways

• Organizational simplifications and AI investments are expected to improve net margins by reducing staffing and operational costs.
  
• Expansion in high-growth regions and enhanced transaction banking capabilities may significantly boost revenue and net income.
  
• Volatile interest rates, competitive wealth management, and strategic restructuring pose significant risks to HSBC's revenue growth and cost-saving objectives.

Catalysts

Engages in the provision of banking and financial products and services worldwide.

• HSBC has implemented organizational simplifications, which are expected to deliver around $1.5 billion of annualized savings by 2026 through deduplication, primarily impacting staffing costs and thus improving net margins.
  
• The bank is focusing on expanding in high-growth areas like wealth management in Asia and the Middle East, where they have competitive advantages, projected to grow wealth revenues at a double-digit CAGR, impacting revenue growth positively.
  
• HSBC plans to enhance its transaction banking capabilities in high-growth markets such as Mainland China and India, leveraging its status as a leading global trade bank to generate additional fee income, thereby improving revenue streams and net income.
  
• The ongoing share buybacks, supported by a strong capital generation which has allowed the return of substantial capital to shareholders, are expected to continue enhancing EPS through reduced share count, positively affecting future earnings per share.
  
• Investments in AI and new technologies aim to increase productivity, improve customer service and process efficiency, likely reducing operational costs over time, which will positively affect net margins and overall earnings.

HSBC Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HSBC Holdings's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.4% today to 35.6% in 3 years time.
• Analysts expect earnings to reach $24.6 billion (and earnings per share of $1.55) by about March 2028, up from $22.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Banks industry at 7.2x.
• Analysts expect the number of shares outstanding to decline by 4.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.0%, as per the Simply Wall St company report.

HSBC Holdings Future Earnings Per Share Growth

Risks

• The interest rate environment remains volatile, which could negatively impact the banking NII, a crucial revenue stream for HSBC. A decrease in interest rates could compress net interest margins.
  
• The competitive environment in wealth management, particularly in Asia and the Middle East, poses a challenge to HSBC's ability to capture market share and could strain profit margins if competition drives down fees.
  
• The cost savings target of $1.5 billion relies on successful reallocation from nonstrategic or low-return activities, which carries execution risk and might lead to minimal short-term revenue gains while incurring upfront costs.
  
• HSBC’s plans to reduce complexities and create a more agile bank involve a restructuring cost of $1.8 billion, which could impact short-term earnings if the expected efficiencies and savings do not materialize as projected.
  
• The decision to wind down M&A and ECM activities in regions like the U.K. and the U.S. to focus on Asia could potentially miss out on opportunities in those regions if market conditions change or if the investments in Asia do not yield expected returns promptly, impacting overall revenue growth potential.

Valuation

• The analysts have a consensus price target of £9.387 for HSBC Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £11.84, and the most bearish reporting a price target of just £7.86.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $69.2 billion, earnings will come to $24.6 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of £8.53, the analyst price target of £9.39 is 9.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.