Core views

After nearly 160 years of intensive work, HSBC Holdings has a deep layout in important global trade channels. It has outstanding transaction banking capabilities and advantages to serve global trade, and will greatly benefit from the current major industrial transfers to emerging economies such as Southeast Asia, the Middle East, and Mexico. We have meticulously scaled and rate-driven attributions to HSBC's transactional banking revenue. The results show that the continued increase in the scale of trade and investment can effectively hedge against interest rate fluctuations. Combined with the additional addition of the retail wealth business, it is expected that HSBC Holdings will smoothly cross the upcoming European and American interest rate cut cycle, show strong steadiness in terms of revenue growth, ROTE, and dividend returns, effectively break free from the long-term constraints of interest rate cycles, and achieve continuous and stable valuation increases.

summary

It has a long history, extensive business areas, and deep collaboration in business sectors: HSBC Holding Group has a history of nearly 160 years since its establishment. With Hong Kong, China and the United Kingdom as its two major bases, the business area covers more than 60 countries and regions along important trade channels in Asia, Europe and the US. There are three major global business segments with deep collaboration: 1) commercial finance, which mainly serves medium and small enterprises; 2) global banking and capital markets, which mainly serve multinational enterprises, as well as investment banking and financial market businesses; 3) retail banking and wealth management.

The core growth point of large corporate business: transaction banking: HSBC's large corporate business includes the two major sectors of commercial and commercial finance and global banking and capital markets. In addition to traditional credit and investment banking, the transaction banking business spans two major sectors and jointly serves large, medium and small business customers around the world. It mainly consists of four major businesses: 1) global trade finance, 2) global payments and cash management, 3) foreign exchange, and 4) securities services. HSBC began with global trade 160 years ago. Today, the trade business is still a key link connecting its global layout, and transaction banks that serve global trade are HSBC's core competitiveness. The core characteristics of the two major transactional banking businesses, cross-border and offshore, bring them significantly higher revenue generation capacity than local onshore businesses (the ability of cross-border customers to generate revenue is 5 times that of local customers). In 2023, transaction banks contributed more than 40% to the group's revenue.

Why HSBC? A wide range of regions, a full range of products, many customers, and a unique advantage in the medium-sized enterprise customer base: HSBC's transactional banking network basically covers the global trade chain, and has the highest market share in several core regions such as Asia, Europe, and America. At the same time, benefiting from obvious scale effects, HSBC's services are extremely efficient and have obvious advantages for the vast number of medium-sized enterprises and small enterprises scattered across important global trade channels. The current industrial transfer to Southeast Asia, the Middle East, and Mexico is highly coincident with the key regions of HSBC Trading Bank, and is expected to continue to boost revenue.

Transaction bank revenue size and interest rate driven attribution: We conducted a detailed attribution analysis of the four major businesses of transaction banks and split their revenue growth into scale factors driven by trade volume and FDI and interest rate factors driven by interest rates. The results showed that trade finance business revenue was dominated by scale factors, and scale and interest rate factors affected about 2. 2:1. The payment and cash management business is driven by both scale and interest rates. Scale and interest rate factors influence approximately 0.7:1. The foreign exchange business is mainly driven by scale. It is related to exchange rate fluctuations, and has little to do with the absolute value of interest rates and exchange rates. The impact on the scale of the securities service business is slightly larger. The impact on scale and interest rates is about 1. 3:1. After each is weighted according to revenue contributions, the long-term average of transactional bank revenue is about 1.4:1. 4. 1:1. The continuous increase in the scale of trade and investment can effectively hedge against interest rate fluctuations.

Transaction bank revenue elasticity is expected to smooth out the impact of the interest rate cycle: Looking at the scale of transaction bank revenue and interest rate attributions in the global trade and industry context of the past 20 years, we found that within a clear industrial transfer cycle, trade and FDI investment scale dividends that follow industry transfers will greatly increase the contribution of scale factors, completely smoothing the impact of interest rate cycles, and transaction bank revenue showing strong scale-driven characteristics. However, in a cycle where there was no clear industrial transfer and global trade was lackluster, the scale factor declined markedly, and the impact on interest rates increased dramatically. Based on this, based on different assumptions about the prospects for global industrial transfer, in the context of Europe and the US about to enter an interest rate cut cycle, we further conducted a scenario analysis of HSBC's revenue for the next three years. The results showed that under an optimistic scenario, industrial transfers returned to the peak level of the previous cycle, and transaction bank revenue can also contribute about 10% to upward revenue elasticity after completely hedging the negative effects of interest rate cuts. Under a neutral scenario, industrial transfers remained at the historical long-term average level, including peaks and troughs, and the increase in transaction banks' revenue basically hedged the impact of interest rate cuts. Under the pessimistic scenario, no new round of industrial transfer occurred, and transaction bank revenue offset the impact of interest rate cuts by 6-8 percentage points. The company's 2024 $4.1 billion net interest income (Banking NII) guide is based on interest rate flexibility between pessimistic and neutral scenarios, and it is expected that there is room for actual banking NII and revenue to exceed expectations.

The retail wealth business is highly coincident with regions where revenue is growing rapidly, and there is great potential: Asia is the fastest growth point for global wealth in the future, and the global asset allocation needs of wealthy Asian people are a major opportunity for wealth management business. Furthermore, the cross-border revenue generated by HSBC's retail wealth business is 3 times that of local customers. HSBC's deep retail customer base and extensive global network layout in the Asian region are important guarantees for seizing this opportunity, and are expected to continue to increase its retail business and overall handling fee revenue share.

Revenue and ROTE have a steady outlook, high dividend certainty, and clear attributes of high-quality dividend stocks: benefiting from a solid deposit base in Hong Kong, China and the UK, effective interest rate hedging operations, and additional bonuses from the wealth business, the 2024-26 revenue growth rates are expected to be -1.0%, -1.5%, and 1.3%, respectively, and there is a possibility of exceeding expectations and steadily crossing the upcoming interest rate cut cycle. It is expected to break free from the constraints of interest rate cycle types and achieve long-term sustainable performance growth and valuation improvement. In 2024, the cash dividend rate was 67% (including a one-time special dividend of 17%), a share repurchase scale of US$9 billion, a total return on shareholder cash of 106%, and a total dividend rate of 16.8%. Excluding the one-time special dividend, the total dividend rate also reached 14.1%. With strong support from performance, the dividend level is expected to be stable and sustainable. ROTE is expected to remain in the 14.5%-14.9% range in 2024-26, with a current valuation of 0.91 times 24-year P/TB (0.84 times 24-year P/B), covering the initial purchase rating. The target valuation is 1.24 times 24-year P/TB (1.15 times 24-year P/B), corresponding to a target price of HK$83.5 per share.