Jefferies starts HSBC at 'buy' sees higher payouts than Street consensus

Jefferies started coverage of HSBC at 'buy', telling clients the consensus was 'bang-on' in its estimates for the lender's earnings per share in 2018 and 2019, but well off in its expectations for its policy on payouts.

Having re-engaged on balance sheet growth, alongside eight points of operating leverage, both higher revenues and "robust" capital generation should result, the broker said.

In conjunction, the initial target price was set at 920p.

Regarding HSBC's expected dividends per share in 2018 and 2019, Jefferies penciled in a 60 cent payout next year followed by 66 cents for the year after, which was 30% above the consensus on the Street.

On top of those dividends, Jefferies projected $18bn of excess capital in 2019 which equated to 84 cents a share.

"For the past seven consecutive years, reported revenue at HSBC has ended 10%-30% below where consensus had estimated it just 18 months prior. The culprits
were mix shift, de-risking/disposals, FX headwinds and a deferred prosecution agreement in the USA. These headwinds have largely subsided, in our view [...] This balance sheet growth should drive a 3% revenue CAGR over the next two years," it said.

The broker referenced HSBC's gearing to rising interest rates in the States and the likely benefit to its markets business from any recovery in fixed income as further attractions of the stock.

Management was also on track to deliver $6bn of annualised cost savings by end 2017, Jefferies said, ahead of the $4.5 to $5.0bn target announced in 2016.

Even then, HSBC was not competitive on costs, resulting in a $3bn drag on earnings, 'ceteris paribus', the broker continued, fully addressing that gap would raise earnings by 20% and group return on tangible equity by 200bp.