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Analyst Blog

On Dec 24, 2013, we reiterated our long-term recommendation on HSBC Holdings plc (HSBC - Analyst Report) at Neutral. This was based on the company’s strong third-quarter results. However, slow revenue growth in its mature markets and a still weak European economy remain causes of concern.

Why Neutral?

On Nov 4, HSBC announced impressive third-quarter results. Top-line growth and lower operating expenses were the primary reasons for the strong results. However, weak performance across all businesses, except for Retail Banking and Wealth Management, acted as a headwind.

With its sole focus on fast-growing and profitable markets, in May 2013, HSBC announced the second leg of its cost-cutting program with the aim of saving $3 billion by 2016. Additionally, the company remains strong with respect to its balance sheet and capital position. We expect this capital strength to enable HSBC’s expansion of market share and consistently pay dividends.

However, revenue growth at HSBC is expected to remain sluggish in the subsequent quarters, as the low interest rate environment will continue to hamper revenue generation. Further, though the company is striving with its cost rationalization efforts, rising wage inflation and strategic investments will not allow it to make the cost line favorable any time soon.

Moreover, the Zacks Consensus Estimate for 2013 declined 1.7% to $4.72 per share over the last 60 days. Similarly for 2014, the Zacks Consensus Estimate fell 2.5% to $5.05 per share, over the same time-frame. Hence, HSBC now has a Zacks Rank #4 (Sell).

Other Foreign Banks Worth Considering

Some better-ranked foreign banks include Grupo Financiero Galicia S.A. (GGAL - Snapshot Report), BBVA Banco Franc (BFR - Snapshot Report) and ICICI Bank Ltd. (IBN - Analyst Report). While Grupo Financiero carries a Zacks Rank #1 (Storng Buy), BBVA Banco Franc and ICICI Bank have a Zacks Rank #2 (Buy).

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