JPMorgan downgrades HSBC on rising emerging market credit risk

JPM said it saw valuation downside due to the potential for rising inflows of non-performing loans (NPLs) in emerging markets.

"We expect a modest increase in impairment with risks to the downside in 2016/17, primarily driven by Asia."

Moreover, persistent pressure on revenues is forecast to continue despite rising US interest rates, while JPM saw "little or no growth" to come in the dividends per share (DPS) rate.

The broker noted that the market is already pricing an EM NPL cycle into rival StanChart’s valuation, which has brought its shares down to a 40% discount to HSBC, even though it has a stronger capital position based on CET1 levels and has already cut DPS to preserve capital.

For dividend yield and for its top UK sector pick, JPM said it preferred Lloyds Banking Group.

"We believe management's cost focus is a positive with costs expected to remain flat over 2014-17E on an FX adjusted basis. However, we expect pressure on revenue to continue with the group restructuring $220bn RWAs over this period (ex Brazil & Turkey disposals) and a challenging outlook for redeployment into higher return business (circa $150bn)."

JP Morgan's analysts not only forecast underlying revenues excluding disposals would be flat in 2016 but also saw downside risk to those forecasts, which were 2/3% below the general consensus, with DPS to remain flat at 50 cents in 2015 and 2016.

They did not expect a DPS cut, nor assume neutralisation of the group‘s scrip dividend of circa 30%.