Hang Seng Privatization And Hong Kong Real Estate Pressures Will Weigh On Future Returns

Catalysts

About HSBC Holdings

HSBC Holdings is a global banking and financial services group with a large presence in Hong Kong, the U.K., Asia and the Middle East.

What are the underlying business or industry changes driving this perspective?

• The planned privatization of Hang Seng Bank concentrates earnings and capital in Hong Kong at a time when commercial real estate credit quality remains under pressure. A weaker Hong Kong office market for longer could limit profit growth and RoTE expansion from this deal and weigh on earnings volatility.
• The group is leaning harder into banking net interest income, citing HIBOR and a growing structural hedge as tailwinds, while the US dollar rate curve is a headwind. Any compression in deposit margins or faster rate cuts would reduce NII resilience and constrain revenue.
• The business is exiting 11 noncore activities and recycling costs into priority areas, which tightens the margin for error. If new investments in the U.K., Asia Wealth and infrastructure lending do not scale as intended, group cost growth near 3% could outpace incremental income and pressure net margins.
• Wealth and insurance earnings rely heavily on market levels and customer activity, with strong recent fee and CSM growth tied to favorable markets and Hong Kong equity trading. A weaker market backdrop or slower net new invested assets in Asia could flatten fee income and temper earnings.
• The balance sheet is increasingly exposed to long dated structural themes such as nonresident customer flows into Hong Kong and intra Asia trade. Any slowdown in cross border activity or shift in deposit behavior could soften deposit growth, reduce transaction banking fees and moderate revenue.

Assumptions

This narrative explores a more pessimistic perspective on HSBC Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming HSBC Holdings's revenue will grow by 8.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 28.6% today to 34.6% in 3 years time.
• The bearish analysts expect earnings to reach $25.3 billion (and earnings per share of $1.5) by about January 2029, up from $16.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $29.8 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2029 earnings, down from 18.2x today. This future PE is lower than the current PE for the US Banks industry at 10.1x.
• The bearish analysts expect the number of shares outstanding to decline by 4.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bank is reporting mid teens and high teens returns on tangible equity across all four business lines, and management is explicitly targeting mid teens RoTE or better into 2025. If these levels are sustained, they could support earnings and make a prolonged share price decline harder to justify by improving profitability and capital generation.
• Wealth and insurance are seeing strong fee and other income, with Wealth revenue at $2.7b and total invested assets at $1.5t supported by net new invested assets of $29b, more than half from Asia. If this multi year shift toward higher fee businesses continues, it could underpin revenue and earnings growth rather than pressure them.
• The planned privatization of Hang Seng Bank, combined with exits from 11 noncore activities and redeployment of costs into areas such as U.K. lending, Asia Wealth and infrastructure, is aimed at creating better operational leverage and efficiencies. If integration and reinvestment work as intended, group net margins and earnings could benefit.
• Customer deposits of $1.7t with $86b growth over 12 months, along with tailwinds from HIBOR and a growing structural hedge of $585b, support the upgraded banking NII guidance of $43b or better for 2025. If this strong deposit franchise remains intact, it could keep revenue and earnings more resilient than a bearish share price view assumes.
• Credit trends, including an ECL charge of $1b that is flat year over year and management keeping guidance around 40 basis points, together with collateralized Hong Kong commercial real estate exposures and signs of stability in Hong Kong residential and retail property, suggest that if asset quality stays within these ranges, impairments may remain manageable for earnings rather than trigger a sustained decline in profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for HSBC Holdings is £7.73, which represents up to two standard deviations below the consensus price target of £11.11. This valuation is based on what can be assumed as the expectations of HSBC Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £14.13, and the most bearish reporting a price target of just £7.65.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $73.0 billion, earnings will come to $25.3 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of £12.77, the analyst price target of £7.73 is 65.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.