HSBC upgrades Standard Life and Aberdeen

HSBC upgraded its recommendation on shares of Standard Life and Aberdeen ahead of their merger, telling clients the combination was "sensible (but defensive)".

Their tie-up would build scale, diversify their businesses and help to compensate for revenue and cost pressures.

That did not mean the merger addressed all their issues but it did throw up some revenue and net inflow synergies, HSBC said.

The broker estimated £200m of proforma pre-tax cost savings.

In terms of profitability, margins were seen relatively stable at 44 basis points over 2017-2019 as the firms offset low margin outflows from books in run-off with higher margin inflows.

Valuation was also supportive, according to HSBC.

At their then current prices, the shares were pricing in no growth in Standard Life's operating earnings per share over the 2016 to 2019 period, the broker said.

HSBC on the other hand estimated operating EPS would grow at annual pace of 9% and the dividend per share by 10%.

There were also signs that outflows from both asset managers' funds might be easing.

Its estimate of cost synergies might also prove to be shy of the mark, the broker admitted.

The recommendations on shares of both firms were boosted from 'hold' to 'buy'. In parallel, the target price on Aberdeen was raised from 286.0p to 350.0p and that for Standard Life from 400.0p to 460.0p.

"We believe the cost synergies are conservative given both managements' track record in past acquisitions, and the UK asset management sector average at 50%."