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Trouble is brewing at HSBC — the largest bank in Europe is facing renewed pressure from its biggest shareholder, Chinese insurer Ping An, to restructure its business. But Morgan Stanley is sticking to its bullish stance on the U.K.-based bank, calling HSBC its “top pick” in the sector. Ping An is doubling down on its call for HSBC to spin off its Asia business, saying on Tuesday that HSBC has “fundamentally failed to address key business model challenges.” HSBC hit back at the proposal, claiming that a ” structural reconfiguration” of its Asia business would result in “material loss of value” for shareholders . Morgan Stanley is looking past that noise. Instead, it’s focused on HSBC’s fundamentals. “Improving China GDP growth post-reopening, plus sustained higher U.S. rates, means investors should focus on HSBC’s improving [return on equity],” the bank’s analysts, led by Nick Lord, wrote in a note on April 18. While rising interest rates have improved HSBC’s net income margins, the benefit of higher rates on returns hasn’t been reflected in its share price, the analysts added. “As ROE improves, we see HSBC returning up to 12% of its market cap in the next 12 months to shareholders. Valuation looks compelling,” the bank added. It noted that though HSBC’s share price has been affected in recent weeks by turmoil in the global banking sector and a more challenging economic outlook, HSBC has “strong capital and liquidity ratios” and is “exposed to some of the faster growing parts of the world.” Morgan Stanley expects HSBC to deliver “accelerating” capital returns, with 50% of 202 earnings paid out in dividends and share buybacks amounting to $3 billion in 2023. “Over the next 12 months, HSBC could return 12% of its market cap to shareholders. Further out, we see not only the 50% dividend payouts, but annual share buybacks of $8 billion in 2024/25,” according to Morgan Stanley. Shares of HSBC are up nearly 16% this year, but Morgan Stanley expects more upside ahead. The bank has a price target of 65.2 Hong Kong dollars ($8.30) on the Hong Kong-listed shares of HSBC, which represents potential upside of 15.6% to its closing price on Thursday. HSBC’s future Shareholders will vote on Ping An’s proposal at the bank’s annual general meeting on May 5. The proposal has so far failed to attract support from other large institutional shareholders. Advisory firm Glass Lewis, a shareholder, also recommended that investors vote against the proposal, saying it’s “not in shareholders’ interest.” — CNBC’s Michael Bloom contributed to this report.
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