Core views

This organizational restructuring fully reflects HSBC's “Hong Kong+UK” two major local markets and the two core strategic layouts of “Global Transaction Banking+Global Wealth Management”. Judging from the impact, this adjustment has strengthened the importance and autonomy of the two major local markets; reduced complicated processes, which is conducive to cost savings; and at the same time, the integrated layout of public lines and trading banks has been strengthened, which is conducive to fully responding to the current trend of global trade and supply chain decentralization and making better use of the core advantages of global banks. As global credit demand recovers and the industrial transfer process progresses, HSBC is expected to smoothly cross the current cycle of interest rate cuts in Europe and the US, show strong steadiness in terms of revenue growth, ROT E, and dividend returns, and achieve continuous and stable valuation increases.

occurrences

On October 22, HSBC Holdings issued the “Simplified Organizational Structure to Accelerate Implementation Strategy” announcement. Through the simplified organizational structure, the four major business lines of Hong Kong (Hong Kong), UK (UK), Corporate andIns titutional Banking (corporate and institutional finance), and International Wealth andPremier Banking (International Wealth Management and Excellent Financial Management) have been adopted.

Brief review

1. HSBC integrates business lines to simplify the business structure, and the “Hong Kong+UK” two major local markets+the two core strategic layouts of “Global Transaction Bank+Wealth Management Bank” are highlighted.

There are two main aspects of this organizational restructuring. One is the restructuring of business lines, and the other is the regional market management structure. In terms of business line restructuring, HSBC integrated the original CMB (commercial finance) and GBM (global banking and capital markets) sectors into one line, collectively known as Corporate and Ins titutional Banking (corporate and institutional finance). In addition, the two local market businesses in Hong Kong and the UK are listed as separate lines, including all business-to-business (CMB) and retail (WPB) businesses in the region. As a result, HSBC's current business lines have been adjusted to four major business lines: Hong Kong, the United Kingdom, corporate and institutional finance, international wealth management, and excellent financial management. Specifically:

(1) Hong Kong Business (Hong Kong): Includes the commercial and personal banking business of HSBC Holdings and Hang Seng Bank in Hong Kong. The management team is David Liao and Surendra Ros ha unchanged.

(2) UK business (UK): The main entity is HSBC UK ring-fencedbank (UK ring-fencedbank). The UK Segregated Bank was established in 2019 in accordance with the requirements of the UK's “fence” reform and needs to separate traditional commercial banking business from investment banking business. The newly established UK business line includes HSBC's commercial finance business and personal finance business in the UK region. The management team remains the same as Ian Stuart.

(3) Corporate and Institutional Finance (CIB): Includes all commercial and commercial finance businesses (CMB) and global banking and capital markets businesses (GBM) outside of the UK and Hong Kong. It essentially integrates the current two major lines of CMB and GBM. The management team is Michael Roberts (current US Regional CEO).

(4) International Wealth Management and Excellent Wealth Management (WPB): This is the WPB sector after excluding Hong Kong and UK businesses, and includes all private banking, wealth management, investment management and insurance businesses outside of Hong Kong and the UK. The management team remains Barry O'Byrne (current WPB CEO).

In terms of regional restructuring, HSBC has simply divided the regional management framework into two major markets: East and West. The east includes the Asia Pacific and Middle East regions, which are overseen by the management of the Hong Kong business line (David Liao, Surendra Ros ha). The Western Market includes non-isolated banks operating in the UK, mainland Europe and the US. These regional businesses are mainly public wholesale banking business and global transaction banking business, and are supervised by corporate and institutional financial line management (Michael Roberts).

Overall, the organizational structure simplification fully emphasizes the competitive advantages of HSBC's “Hong Kong+UK” + the two core strategies of “Global Transaction Banking+Global Wealth Management”. CEO Ai Qiaozhi clearly stated, “This new structure allows us to focus more on businesses with competitive advantages and maximum growth opportunities, thereby strengthening our leading position and market share. Help us achieve the next level of growth.” 2. Judging from the impact, this restructuring has strengthened the importance and autonomy of the two major local markets; reduced complicated processes, which is conducive to cost savings; and at the same time, it has strengthened the integrated layout of public lines and transaction banks, which helps HSBC to better utilize the core strategic advantages of global banks.

(1) Separate the two major local markets of Hong Kong and the United Kingdom into one line, which mainly reflects the core position and “priority strategy” of the two major local markets, strengthens decision-making autonomy, and reduces the complexity of the processes created by the matrix structure. The two major local markets, Hong Kong and the United Kingdom, are large in size, have a deep deposit and loan base, and complex and diverse business types. They are a solid base for HSBC. However, under the current regional and business matrix management structure, the implementation of some businesses requires reporting not only to the management of the region, but also to the management of the corresponding CMB or WPB line. Decision-making efficiency is relatively low, making it difficult to keenly capture changes and opportunities in the local market. After this restructuring, the two major local markets of Hong Kong and the United Kingdom were fully empowered, and the public and retail businesses were directly managed uniformly by local market management, strengthening collaboration and customer base transformation between the public and retail sides within the region, and effectively improving autonomy. This not only speeds up the decision-making process and efficiency, avoids complicated processes and reduces costs, but also improves the timeliness and pertinence of decisions. It can better grasp the development opportunities of the local market and avoid specific risks in the local market (such as Hong Kong real estate, etc.) earlier and faster, thus maintaining HSBC's leading position in Hong Kong and the UK for a long time. Furthermore, in business involving global transaction banks, the Hong Kong and UK lines normally collaborate with the CIB line, which is consistent with the current product and business collaboration process of CMB and GBM. Simply put, the core goal of separating the two major markets of Hong Kong and the UK is to enhance the autonomy and decision-making timeliness of the core market, better seize market opportunities, and consolidate market position. This does not mean a disconnect from HSBC's global banking strategy system.

(2) Integrating large pairs of public lines under the “local to public+global transaction bank+global financial market” integrated service not only avoids structural redundancy, reduces costs, and improves customer service efficiency; it also breaks regional and customer base boundaries and forms a more comprehensive global transaction banking system, which can effectively cope with the current trend of global trade and supply chain decentralization. The two major lines of GBM and CMB themselves mainly serve the public customer base. GBM serves more of the world's large enterprise customers and financial market business, and CMB serves more of the SME customer base's public business and transactional banking business. The two themselves have a lot of overlap in terms of business and customer groups. After this integration, on the one hand, the problem of unclear authority, responsibility and division of labor was avoided, and repetitive business construction and redundant structures were reduced. It can not only optimize costs, but also improve business efficiency. On the other hand, after integration, it can also better drive business collaboration, which is conducive to better driving financial market business to serve corporate customers, and can also consider the customer base of large, medium, and small enterprises as a whole to form a more comprehensive global transaction banking system. In the current general environment where global geopolitical issues are intensifying and the trade relationship between China and the US is unclear, the global trade chain and capital chain are showing a trend of decentralization and diversification. This business adjustment not only breaks down barriers between regions and business lines, and makes services and products more comprehensive; it can also comprehensively consider global trade and industrial transfer trends, better face the trend of global trade and supply chain fragmentation, and dispel market concerns.

(3) This structural adjustment will bring about certain personnel optimization, which is conducive to reducing operating costs and improving profitability, thereby maintaining a stable level of ROE. From the management perspective, the Group Operations Committee will retain only 12 members under the simplified structure, 6 fewer than the current Executive Committee. Furthermore, a series of structural adjustments will also lead to some personnel optimizations. HSBC's operating costs are expected to drop further, and there is still room for optimization of the cost-revenue ratio. According to the company announcement, the specific cost optimization situation will be disclosed in the annual report for the year 24.

3. Investment advice: This organizational restructuring fully reflects the two core strategic layouts of HSBC's “Hong Kong+UK” local markets and “Global Transaction Banking+Global Wealth Management”. Judging from the impact, this restructuring has strengthened the importance and autonomy of the two major local markets, reduced complicated processes; at the same time, it has broken regional and customer boundaries and strengthened the integrated layout of public lines and trading banks, which will help HSBC to more fully respond to the current trend of global trade and supply chain decentralization and make better use of the core advantages of global banks. As global credit demand recovers and the industrial transfer process progresses, the continuously increasing scale of trade and investment can effectively hedge against interest rate fluctuations. It is expected that HSBC Holdings will smoothly pass through the current interest rate cut cycle in Europe and the US, showing strong steadiness in terms of revenue growth, ROTE, and dividend returns, effectively breaking away from long-term restrictions on the types of interest rate cycles, and achieving continuous and stable valuation increases.

Revenue growth in 2024-26 is expected to be -0.5%, 1.1%, and 1.6%, respectively, and profit growth rates of 4.6%, 0.4%, and 0.3%, respectively. The 2024 cash dividend rate is 67% (including a one-time special dividend of 17%). If the share repurchase amount is 9 billion US dollars, the total return on shareholders' cash is 106%. The current stock price corresponds to a total dividend rate of 15.9%. The characteristics of high dividends are remarkable. ROTE is expected to remain around 15% in 2024-26. Supported by strong performance, the dividend level is stable and sustainable. The current valuation is 1.02 times 24-year P/TB (0.96 times 24-year P/B), maintaining the buying rating and leading position in the banking sector.

4. Risk warning: (1) The extent or time of the Federal Reserve's interest rate cut exceeded expectations. (2) The global macroeconomy has entered a new round of recession, or real estate companies in mainland China continue to be exposed to risks, affecting the asset quality of HSBC Holdings and leading to a sharp decline in profits. (3) The company's dividend rate may fall short of expectations due to special reasons such as policy restrictions. (4) Some regions where HSBC Holdings operates may have sovereign credit risk. (5) Global industrial transfers are uncertain, geopolitical frictions, or US industrial restrictions may hinder the globalization process, which in turn has led to a sharp decline in the scale of global trade and capital flows, causing the development of the company's transaction banking business to fall short of expectations.