HSBC Bank Malta plc (“HSBC” or the “Bank”) through its parent company HSBC Holdings plc, is the leading international banking and financial services group in Malta. HSBC provides a comprehensive range of financial services including retail banking and wealth management, commercial banking, and global banking and markets.
The Bank is also active in the business of life assurance and fund management. During 2019, HSBC has successfully completed its restructuring exercise, which resulted in the reduction of 180 full-time employees at a one-time cost of €16 million and the closure of eight branches, which as claimed by management will enable the Bank to benefit from sustainable savings from 2020 onwards, with full annualised saving delivered in 2021.
The Bank’s recently issued financial performance for 2019 has outperformed expectations, with management attributing this to their continued focus on cost mitigation and credit quality. HSBC reported growth in revenues which surpassed the growth in costs if adjusted for the one-off restructuring cost. This translated to a cost efficiency ratio of 70% in 2019 down from 73% in 2018.
This was achieved despite an environment where the banking industry is being battered with low interest rates; coupled with continuously increasing capital requirements as a consequence of more stringent regulations, and increased costs mainly related to risk management and compliance.
Contrary to its local peers the Bank’s de-risking exercise appears to be complete, which puts it at a competitive advantage to benefit from growth within its risk appetite. This was evident with the Bank reporting an increase of 60% in new bank account openings, and higher profitability in retail banking and balance sheet management, coupled with increased momentum in commercial lending during the fourth quarter of 2019.
Management expects this trend to subsist in 2020. Moving forward the Bank will continue focusing on digitalising its services, which we believe is essential in view of the rapid increase in customers’ preference for digital services, with the Bank’s digital usage up 92% in 2019 and 95% of new bank account openings opting for the online option. The Bank is uniquely positioned to take advantage of the technological scale vis-à-vis its relationship with its parent company, and thus create a more efficient product offering at better margins than competitors. This places HSBC at the forefront of creating a truly modern bank and delivering a cost efficient product offering which is scalable and competitive.
Recently the research team at Calamatta Cuschieri upgraded their stance on HSBC Malta to a Buy with a one-year price target of €1.25, offering a potential capital upside of 16.8% from the current price of €1.07 as at the time of this writing. The Bank’s adjusted return on equity and earnings yield currently stands at 6.1% and 7.4% based on FY19, improving in FY20 to around 6.9% and 8.6% respectively based on our forecasts.
HSBC is trading below book value, currently at 0.82x with its parent, HSBC Holdings plc currently trading in the range of 0.8x-0.9x and Lombard Bank Malta plc trading at 0.88x. In view of the Bank’s positive outlook and its ability to continue reporting improved financial performance for the foreseeable future, we deem that a price to book multiple of 0.90x as appropriate. Management confirmed that the sale of properties that were previously used as branches is not material to the Bank, and accordingly we do next expect special dividends for the year/s concerned.
Malta’s economy continued to grow during 2019, however it is also facing strong headwinds on issues concerning the rule of law and prevention of financial crime, which consequently damaged the country’s reputation and its attractiveness as a financial services hub. This impacted financial intuitions nationwide and 2020 will be monumental to align the country to international standards. Failure to do so will present unmeasurable downside risk to the local economy. HSBC’s capital ratios continued to strengthen year-on-year from a total capital ratio of 14.4% in 2017 increasing to 19.0% in 2019, despite last year’s €16 million one-off restructuring cost. The improvement in the Bank’s capital ratios is reflective of the improvement in asset quality, with non-performing exposures decreasing by 13% during 2019.
We are cognisant of the unfavourable regulatory capital requirements emanating from the MREL and Basel IV requirements forcing the Bank to retain increased levels of earnings. However, we are of the opinion that the Bank’s strong capital position will enable it to continue distributing a healthy level of dividends for the foreseeable future. We acknowledge that the banking industry both locally and at an EU level remain largely unattractive due to the double edge sword created by the low interest rates environment to boost economic growth, with the European Central Bank enforcing stricter regulations to prevent a financial meltdown like that of the 2008 financial crisis. Nonetheless, we of the opinion that shareholders’ return will grow in line with HSBC’s ability to increase revenue within a sustainable level of risk tolerance, while also reducing its cost base.
Disclaimer: This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Analyst views to buy, sell or hold on particular stocks or instruments are related to the stock/instrument being reviewed and are not to be treated as personal recommendations to investors, which are only issued following suitability assessment.