Analysts at JPMorgan downgraded global banking giant HSBC to 'underweight' from 'neutral' on Wednesday, noting the troubled outlook for revenue growth might weigh on prospects for the lender's return on tangible equity for longer than previously thought.
JPMorgan cut it's already below company consensus earnings per share forecasts on HSBC for 2019 and 2020 by a further 3-5% as it stripped the shares of their 'neutral' rating and cut its target price from 690p to 620p.

“Although we rate HSBC's management highly and view the group on the right strategic path long term, we believe that revenue growth pressures, alongside cost investment needs, could weigh on the ROTE outlook for longer than we previously thought,” JPM's analysts said.

JPMorgan said it no longer sees the 11% ROTE forecast by HSBC as being achievable in 2020 based on normalised impairments and also noted that, against that, the premium valuation of HSBC's shares at 1.2x P/TNAV for 10% RoNAV was exposed to “rising downside risk”.

“We continue to expect that HSBC's 51c dividend will remain stable over the medium term, but the 6% yield could move higher in our view with the market awaiting clarity over B4 impact and UK mortgage RWA inflation,” said the broker.

In contrast, JPM highlighted that a number of other British and European banks offered “attractive and growing capital returns in 2019/2020” with an average dividend yield of 5.5% for the sector and higher dividend growth potential.

“HSBC's weak Q4'18 results are a negative read-across for StanChart but we see valuation at 0.6x P/TNAV as more reflective of the revenue and ROE pressures at StanChart which has more recovery potential over the medium term.”

Analysts at Berenberg reiterated their 'buy' stance and 340.0p target price on RBS stock despite the shares' outperformance year-to-date, arguing that there was scope for “material” capital returns of roughly 12% per year and that the lender continued to be “undervalued”.

“RBS's strength and capital return potential are becoming hard to doubt,” analyst Peter Richardson said.

Notwithstanding the uncertainty in the UK, the lender was generating underlying returns of over 10%, and there was scope for costs savings to lift that to management's 12% target.

Indeed, RBS had blown past consensus estimates (and Berenberg's) for its full-year 2018 payout, delivering 13p per share.

Its ability to deliver a payout that was about 40% greater than Berenberg's already above consensus estimate underlined how “insufficient” the consensus forecasts for 2019 and 2020 were, Richardson said.

“While UK uncertainties persist, we take reassurance from RBS's modest revenue growth (of c3.5%) and robust asset quality (as shown by UK stress tests),” Richardson added.

The analyst went on to explain that for the first time his estimates were now anticipating share buybacks, of £1.0bn in 2019, rising to £1.5bn thereafter.

Richardson believed RBS could return about £3.8bn of capital over the next three years, while maintaining a buffer of 70 and 30 basis points in 2020 and 2021 above its common equity Tier 1 capital target of 14.0%, respectively.

“We believe RBS's ability to conduct directed buybacks can meaningfully offset headwinds from the government's stake sale,” he added.

Fuller's sales of its London Pride brand and other brewing operations for almost 24 times profits has led broker Canaccord to rethink valuations of other pubcos.

As a result, Canaccord upgraded its recommendation on Marston's to 'buy' from 'hold' and increase the target price to 115p from 105p, while reiterating its 'buy' for Greene King but increasing the target price to 695p from 600p.

“Our analysis suggests that the brewing divisions of both companies are undervalued,” said analyst Nigel Parson. “Marston's Brewing is the better business, in our view, and it is potentially a strategic asset to an international brewer seeking a market entry to the UK.”

Marston's share price is little changed over a decade and Parson sees the changing shape of board composition as a “potential catalyst” for a “compelling investment case”, as the brewing arm has been “largely ignored by investors”.

There is “no room” for mid-market brewers any more, the analysts reckons.

Fuller's surprise decision to sell its brewing business has been accused of selling its heart and soul and its spiritual home, yet Parson focused on the fact that the brewery “was being progressively squeezed between the huge and growing marketing and distribution powers of the big brewers, a theme we trace back to the Beer Orders of 1989, and the rapidly growing micro-brewers, a theme we trace back to the introduction of Progressive Beer Duty in 2002.”


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