HSBC Reiterated at Neutral

We are maintaining a long-term ‘Neutral’ recommendation on HSBC Holdings plc (HBC - Analyst Report) as its restructuring initiatives for streamlining operations and improving top line remain on track. However, factors that continue to adversely impact the company’s financials include the deepening Euro-zone crisis, various investigations related to its business operations and regulatory restrictions.

In 2011, HSBC announced its plans to restructure the business with the primary intention of increasing focus on the fast-growing and profitable markets. Some of the major divestitures completed include the sale of its U.S. credit card business to Capital One Financial Corporation (COF - Analyst Report) and 195 of its branches to First Niagara Bank, N.A. – a wing of First Niagara Financial Group Inc. (FNFG - Snapshot Report).

Further, despite the uncertain macro environment, HSBC remains strong with respect to its balance sheet and capital position. We expect this capital strength will allow the company to enhance its profitable market share. Also, due to its strong capital base, unlike many of its peers, the company was able to pay dividends over the last three years, though at a reduced rate.

Additionally, improving profitability ratios are a major positive at HSBC. Despite the global turmoil during the last few years, the company has been able to remain profitable in a situation where financial institutions suffered the most. In 2011, the bank’s return on average equity and return on risk-weighted assets increased to 10.9% and 1.9%, respectively, from 9.5% and 1.7% in the previous year.

On the flip side, though HSBC has been reporting stable operating income over the last several quarters, growth in core business performance indicators, including net interest income and fee income, has been unsatisfactory. Additionally, the company would find it difficult to sustain in a sluggish economy, coupled with low interest rate environment and increased regulations.

Also, relatively high inflation and wage pressures in some major Asian markets, where the company is increasing its investments, could hamper HSBC’s business growth in the region. Housing price inflation in some of the Asian markets is very high, raising risks of asset-quality troubles for company. Though HSBC’s usually-conservative nature may protect it to some extent, it will not be possible to remain unscathed.

HSBC is scheduled to announce its third quarter 2012 results early next week. We expect the company to benefit from the stable performances of its operating segments and growth in overall revenue. Further, the company is well positioned to benefit from its extensive global network, diversified revenue sources and strong capital position.

HSBC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.