Deutsche Bank said HSBC has been a relative outperformer in recent years despite a 16% fall in the shares since the start of 2018 but thinks there are significant headwinds arising that are not reflected in consensus forecasts or the share price.
In morning trading, HSBC shares were down 1.3% to 639p.
Headwinds include changes to US interest rate expectations, which has had an impact on the outlook for revenue growth.
Deutsche Bank still expects three rate rises in 2019-20, but the market is pricing in zero, which would represent a further 3% off earnings.
“We do not think consensus reflects this risk to earnings,” Deutsche Bank said.
Another headwind is in Hong Kong where Deutsche Bank analysts expect to see a 25% drop in house price from September 2018 to the end of 2019.
Deutsche Bank also sees associated income risks for China’s Bank of Communications, should assumptions for value-in-use change for HSBC's stake.
“This is an accounting rather than economic effect, but we do not think consensus reflects the risk of impairment to associate income, which would affect earnings and valuation multiples,” the investment bank said.
HSBC’s valuation is expensive compared to other US large caps, European banks and UK domestic lenders, Deutsche Bank added.
The bank has a dividend yield of 6% but Deutsche Bank said this does not rise over its forecast period and sees better opportunities for capital returns at Barclays PLC (LON:BARC), Royal Bank of Scotland Group PLC (LON:RBS) or even Standard Chartered PLC (LON:STAN).
Top picks Barclays, RBS and Lloyds
Deutsche Bank’s top picks in order of preference are Barclays, RBS and Lloyds Banking Group PLC (LON:LLOY) with a ‘buy’ rating on all three. It prefers UK large-cap domestic banks over UK international stocks like HSBC and Standard Chartered despite the ongoing uncertainty over Brexit.
Last year, UK bank shares fell between 16-26% but they still outperformed European banks.
“Part of this was a narrowing of the 'Brexit discount' (we estimate this is currently 15% vs a peak of 20%) but it also reflects, we believe, better fundamentals in the UK (customer NIM remains far more stable in the UK than in the Eurozone),” Deutsche Bank said.
Deutsche Bank cuts target price on Standard Chartered
With that in mind, Deutsche Bank maintained a ‘hold’ rating on Standard Chartered but cut its target price to 580p from 620p, sending its shares down 1.3% to 608p.
“As with HSBC, we see some pressures emerging on revenue expectations due to the recent move in US rates,” it said.
“However, we think expectations for Standard Chartered are likely lower, reflecting the recent weaker operational performance.”
The investment bank said Standard Chartered has excess capital of around US$2.5bn but thinks management will use this to invest in growth or an upgrade of its systems to drive an improvement in returns as returning it to shareholders “won’t solve the return on tangible equity problem” it faces. HSBC could pay a share buyback in 2018 but Deutsche Bank thinks this is more likely in 2020. It expects US$1bn in share buybacks in 2020 and 2021.