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HSBC exposed as Hong Kong becomes proxy battleground for US-China trade war

Analysts at Jefferies have switched preference to Standard Chartered, giving it a double-upgrade

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HSBC Holdings PLC’s (LON:HSBA) Hong Kong risks have been “over-discounted” by the market, said analysts at Jefferies, downgrading their rating on the banking behemoth. 

With Hong Kong facing its own troubles and becoming a “proxy battleground” for the trade war between China and the US, analysts at Jefferies ran a fresh eye over Asia focused HSBC and Standard Chartered PLC (LON:STAN).

READ: HSBC and Standard Chartered sink as China plans to impose new security laws on Hong Kong

Following President Donald Trump call on Friday for a review of Hong Kong’s special status that separates it from China when it comes to trade, the analysts said this has been a mounting investment concern around banks with large operations in the city state since at least the middle of last year. 

“In the case of Standard Chartered and, perhaps, to a lesser extent, HSBC, this risk is starting to look over-discounted,” the analysts said, adding that they expect more negative headlines over the coming weeks.

Noting that commercial real estate represents 15% of group equity for StanChart, compared to around 45% of at HSBC, the analysts said their stock selection preference has shifted to the former.

StanChart’s share price target was upped to 575p from 438p and it was double-upgraded to ‘buy’ from ‘hold’, with the reverse change was made for HSBC, where the price target was slashed to 400p from 790p.

The analyst said they remained “focused on analysing the situation through an unemotional lens. 

“The potential investment set up reminds us – in some ways – of the period immediately following the UK vote in 2016 to leave the EU. The aftermath of this event presented an investment opportunity in domestically concentrated banks.”

After a long-standing bear call on StanChart, the analysts said higher capital markets gearing should benefit both banks in the second quarter and in the medium term. 

They added: “A stock-specific investment opportunity arises given we previously saw the bank being able to achieve a 6% medium-term ROTE when the market was pricing closer to 10%. We now see a path to a mid-7% level with the shares just under 0.4x TBV.

With shares in HSBC, Europe’s largest bank and the sixth in the world by assets, currently trading for around 0.6 times tangible book value, the analysts said the bank faces higher execution risk to its plans, with the 8% upside to the target price “not enough to justify a ‘buy, nor is the risk/ reward set-up attractive”.

Quick facts: HSBC

Price: 377.8 GBX

LSE:HSBA
Market: LSE
Market Cap: £76.94 billion
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