HSBC 2008 results

HSBC is the one of the largest bank and financial insitution conducts business throughout the world with more than 10,000 offices in over 80 countries.2008 results1. Total net revenue up 1% vs 2007

• Good: Net interest income up 13% due to increase in net interest margin on significant interest rate cut;
• Bad: Net fee income down 9% and net trading income down 33% due to equity market down;

2. Reported EPS down 72% vs 2007 to US$0.47;

• Bad: Loan impairment charges & provision up 45% to $25B or 2.3% of its loan portfolio;
• Fair: Goodwill write off $10.6B, write off the goodwill on HFC totally;
• Fair: Excluded goodwill impairment, EPS should be around $1.17, down by 25% vs 2007;

3. Ratio

• Good: Tier 1 capital fall from 9.8% in 3q08 to 8.3% in 4q08, still strong given that no capital injection from government;
• Bad: Return on equity down from 15.9% in 07 to 4.7% in 08;
• Fair: Price / Book Value at 0.7644 (MV $28.25 BV $36.96 as of 03/02/09);
• Fair: Price / Earning at 12.04;
• Good: Cost efficiency ratio keep at 47.2%, lower than peers

4. Balance Sheet

• Bad: Total equity down 27%, huge loss happen in it's AFS assets;
• Fair: Total assets up 7%, exclude derivative contracts, total assets down 6%;
• Bad: Total deposit down 1.6%;
• Fair: Total liabilities (exclude derivative) down 4.7%;
• Bad: Cash flow from operating down significantly by 67%

Risk

• Issue shares at 50% discount to raise $17.7B capital, it will significantly dilute the existed shareholders' earning;
• Growth will slow down on emerging markets;
• Further loan impairment in 2009 if economy get worse and unemployment rate continue to rise

Comments

HOLD (in short term), until the share issuance has been finished and settled;BUY (in long term), fair value HK$115.32.