Analyst slashes HSBC price target to HK$80

CLSA cites problem loans for lower forecast

Brokerage and investment firm CLSA sharply cut its share price target and earnings forecasts for HSBC Holdings over concerns that the London-based lender's non-performing loans could be far greater than the bank expects.

CLSA lowered the bank's 12-month price target to HK$80 from HK$110 and maintained its 'sell' rating. It also reduced its earnings forecasts for HSBC by 20 per cent to US$10.729 billion this year and by 30 per cent to US$14.633 billion for 2009 on expectations of higher provisions and weaker Asian earnings.

Some analysts thought CLSA was too pessimistic.

'I think HK$80 is too bearish, although the operating environments of the major markets like the United States and Europe are not favourable to the bank,' said Ben Kwong Man-bun, chief operating officer at KGI Asia. He said the stock was worth more than HK$80 a share, 'unless they reduce their dividend which stands at over 5 per cent at present'.

Shares of HSBC rose as high as HK$119 at one point yesterday before slipping back to HK$115.40 at the close, down 0.69 per cent.

CLSA analyst Daniel Tabbush said in a report that the recent downgrade of US bond insurers Ambac and MBIA would accelerate credit contraction and the build-up of non-performing loans because it would be more difficult for banks to get default insurance. 'The downgrade of the bond insurers and the [Federal Reserve's] 75 basis point rate cut are symptoms of how troublesome things are about to get,' he added.

Mr Tabbush expected not only subprime lending but traditional loans such as credit cards would also be affected as economies weakened. He expected that HSBC Finance (formerly Household International), a big US subprime lender, could increase its provisions and write-off charges to 17.2 per cent of loans this year and 15.4 per cent next year, compared with 12.5 per cent in the third quarter of last year.

Goldman Sachs cut the bank's price target to HK$114 from HK$119, and added the stock to its 'conviction sell' list last week, saying that HSBC might need to add US$13 billion to its provision for subprime loans.

'HSBC will be underperform in the near term,' said William Wong Kwok-wai, an analyst at BOCI Research.

'Whether we are going to revise the price target on the bank depends on its results.'

BOCI cut the bank's price target earlier to HK$117.50 from HK$133 over concern that weakening US consumption would have an adverse effect on the profitability of HSBC's Asia Pacific (excluding Hong Kong) and Latin American operations.

Mr Kwong expected HSBC would trade between HK$100 and HK$130 this year because the bank's international network still was attractive to long-term investors.