Jefferies switches out of HSBC over Hong Kong concerns

The bank, which previously had a ‘buy’ recommendation on HSBC, said its stock selection preference had switched to Standard Chartered instead, which it upgraded to ‘buy’ from ‘hold’.

It said that Hong Kong commercial real estate represented only 15% of common equity at Standard Chartered, as opposed to 45% of group equity at HSBC.

It continued: “Stress-testing of Standard Chartered and HSBC’s Hong Kong exposure shows a 2x greater capital impact at HSBC. For HSBC, our balance sheet burndown analysis on Hong Kong exposures estimates a 140bps group CET1 impact, from a bottom-up 6% (or $18bn) cumulative loss – higher than the 4.4% industry loss seen during Asian financial crisis – on Hong Kong exposures.

“At Standard Chartered, a similarly constructed analysts estimates a 70bps group CET1 impact from a bottom-up 4% ($3.2bn) cumulative loss on Hong Kong exposures.

“Put another way, a 10% haircut on Hong Kong commercial real estate loans at HSBC would be $6.8bn, or about 30% of our 2021 group pre-provision profit estimate.”

Jefferies believes HSBC can generate an 8% return on total equity by 2022, but its adjusted pe-tax profit estimates for 2020/21 fall 38% across all lines.

“Against higher execution risk, the 8% upside to our price target is not enough to justify a ‘buy’, nor is the risk/reward set-up attractive,” the bank concluded.

China is seeking to introduce a new national security law into Hong Kong, which has prompted a fresh wave of anti-government protests. The US, Canada, UK and Australia have jointly criticised that the proposed law, warning that it could curtail the city’s unique freedoms, but China has accused the countries of interfering.

Jefferies said that the near-term headline risk on Hong Kong was likely to remain negative, but it was “constructive” on the medium-term fundamentals.