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HSBC facing downside risks, says UBS as it maintains 'neutral' rating

UBS prefers domestic banks over Asia-focused HSBC due to downside risks, including income and cost headwinds
UBS raised its target price to 750p from 735p

HSBC Holdings PLC’s (LON:HSBA) premium valuation is driven by investors’ safety concerns about the potential impact of Brexit on UK-focused lenders, UBS said.

But UBS said it still prefers domestic banks over Asia-focused HSBC due to downside risks, including income and cost headwinds.

READ: HSBC's first-half profits beat expectations as investment strategy pays off

The investment bank maintained a ‘neutral’ rating on HSBC but raised its target price to 750p from 735p, citing foreign exchange movements.

Earlier this month, HSBC posted a 4.5% increase in pre-tax profit to US$10.7bn for the first half on the back of a 9.6% rise in net interest income to US$15.1bn.

But UBS said flat loans in the second quarter, further weakening in foreign exchange rates, seasonality in the Global Banking and Markets division and market-gearing in the wealth arm threaten income in the second half.

“Also, our estimates assume HSBC's share of Bank of Communications (China’s fifth largest bank) retained earnings will stop being recognised from the fourth quarter.”

UBS continues to expect earnings per share to rise 3% in 2018 to US$0.73 and to be unchanged in 2019. 

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