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Everything has a price: Berenberg downgrades HSBC to hold from buy on valuation grounds

Berenberg’s analysts said "everything has a price and considering its market-implied cost of equity of 7%, assuming $13bn of annual capital return in perpetuity, we believe HSBC is fully valued”
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They pointed out that they view HSBC as a long-term winner due to two main factors, firstly, its focus on risk and return, and secondly, its focus on cutting costs

Berenberg has trimmed its stance for HSBC Holdings PLC (LON:HSBA) on valuation grounds following a recent boost to the share price, although they are bullish on the potential for cash returns by the global lender.

The German broker has kept its price target for the FTSE 100-lited firm unchanged at 712p but downgraded its rating to ‘hold’ from ’buy’ with the shares currently trading at 724.7p each, down 0.7% or 5.1p on yesterday’s close.

READ: HSBC to keep dividend powder dry even with strong first quarter

In a note to clients, Berenberg’s analysts said: “ HSBC is one of our long-term winners in the sector. However, everything has a price and considering its market-implied cost of equity of 7%, assuming $13bn of annual capital return in perpetuity, we believe HSBC is fully valued and downgrade to Hold.”

They pointed out that they view HSBC as a long-term winner due to two main factors, firstly, its focus on risk and return, and secondly, its focus on cutting costs in absolute terms.

HSBC to continue delivering sustainable capital return

The analysts said: “We see these two traits enabling HSBC to continue delivering sustainable capital return. As the current cycle comes to an end with central banks talking up rates and removing liquidity from the system, HSBC should be able to differentiate itself from its peers due to these two traits.”

They added: “In a world of little growth, paying out 100% of profits is the right route for a bank to follow.

“Ultimately, if there is no ability to redeploy that capital to deliver a 10% return, we believe that banks should return all their profits.”

Following the US stress tests, the analysts said they now include US$3bn per annum of share buybacks in their forecasts for HSBC.

They said: “If we assume HSBC’s dividend remains at the current level in perpetuity, and HSBC undertakes $3bn of buybacks pa, this would equate to c$13bn of capital return pa.

“This is equivalent to over 90% of our 2019 net profit forecasts.”

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