Citi downgrades HSBC to neutral following outperformance

Analysts at Citi downgraded their view on shares of HSBC given the resilience in the lender's share price despite recent earnings downgrades from the analyst consensus.

Year-to-date analysts had cut their forecasts for HSBC's earnings in 2017 and 2018 by approximately 30%, whereas the share price had been broadly flat thanks to Brexit fears and outperformance by emerging markets, among other factors.

That divergence had been particularly evident over the past three months, the broker said, eroding the valuation discount on which the stock had been trading on with respect to their 600p target price.

Hence, Citi downgraded its recommendation from 'buy' to 'neutral'.

Citi's target price was based on a dividend-discount model.

The stock was not without its attractions, there was nearly $6bn in surprlus capital in North America and and almost $4bn in Asia, but HSBC Bank was facing approximately a $10bn capital shortfall.

Furthermore, the stock should profit from higher interest rates given its surplus US dollar-linked deposit franchise, the team of analysts led by Ronit Ghose said in a research report published after the close of trading in New York on 12 September.

However, HSBC's share price history was complex, showing that UK international banks underperformed in a bear-steepening scenario in the interest rate curve, where it was the long-end which led the way.

That is to say, the reason why interest rates were rising "also mattered", the analysts explained, adding that UK international banks tended to fare even worse in bear flattening scenarios (where the short-end led), because of a rising emerging market risk premium against a stronger USD interest rate environment.