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Analysts question profitability, balance sheet targets in HSBC's new strategy

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Analysts question profitability, balance sheet targets in HSBC's new strategy

HSBC Holdings PLC, the biggest bank by assets in Europe and one of the most successful Western players in the Asian market, will not find it easy to achieve all the goals of an ambitious new strategy announced by CEO John Flint on June 11, analysts said.

The bank has officially ended its restructuring and is now focusing on revenue growth and building market share with the help of as much as $17 billion in technology investments, particularly in the Asian markets, said Flint on a conference call discussing the new plan.

"Now that much necessary transformation of the bank is complete and interest rates are returning to normal, it's time for HSBC to get back to growth. That means increasing customer numbers, taking market share and growing profits on a consistent basis," he said from the bank's Hong Kong offices. "In this next phase-in, we'll be taking action to capitalize on our competitive strengths and maximize revenue from high-return, high-margin businesses, particularly in Asia and across our network."

HSBC is envisioning a return on tangible equity of above 11% in 2020, with income growth outstripping cost growth every year beginning with 2019. The bank reported a return on tangible equity of 7.29% in 2017, according to figures from S&P Global Market Intelligence, which also suggest that in the same year Asia became the main source of income for the bank, with a share of operating income exceeding 50%, whereas more than 50% of expenses continue to be rooted in Europe.

UBS took a cautious view of the announcement, as the firm's analysts wrote in a note to investors that the consensus forecast for HSBC's return on tangible equity stood at 10.3% for 2020. The bank's focus on the U.K., the U.S. and Asia "makes sense," according to UBS. However, the bank's capital plans seemed "most surprising" as they envision a growth in risk-weighted assets of 1% to 2% over the period, as opposed to the analysts' own estimate of 4%.

Risk-weighted assets are a crucial determinant of how much capital a bank should set aside to satisfy regulatory requirements and, as such, have a significant influence on shareholder rewards.

"We intend to seek to understand the source of this improved balance sheet efficiency," said UBS. "Perhaps slower RWA growth is required to fund investment spend," they speculated, noting that they expected common equity Tier 1 capital to drop below the current forecast of 14.4% issued by Flint.

London-based analysts at French lender SocGen have also expressed surprise at the 2% RWA growth target, saying that it implied RWAs saves would total $109 billion — a tricky feat at a time of expansion. Such RWA efficiency would inevitably see the bank turning further away from wholesale and capital market business, toward a mix of retail banking, wealth management and property finance, as executives have been hinting since the end of 2017.

Alongside the CET1 target of over 14%, SocGen concluded that "these unanticipated RWA saves will free up $15bn of equity. But management has suggested that it won't return this and is instead planning to allow the ratio to build in order to cover any future increases in risk weights from Basel 4 or any other regulatory change."

S&P Global Market Intelligence data shows the extent to which the firm has already pivoted to real estate, a type of lending that requires far less capital than complex investment banking activity. Commercial real estate accounted for 12.3% of the global loan book at the end of the first quarter of 2018, jumping from 7.8% at the end of 2017. Other types of real estate loans accounted for 41.7% of the total at the end of March, compared to 36.9% at the end of December 2017.

This tendency will continue until at least 2020, especially in the U.K., where the bank is looking to increase its participation in the mortgage sector, said Flint.

"The measures should improve the bank's profitability in the longer term," analysts from ING commented, adding that the news was "slightly credit positive."