Espirito Santo downgrades HSBC on limited returns potential

18th Jun 2015 16:15

Espirito Santo has lowered its rating for global banking giant HSBC from 'buy' to 'neutral', saying the bank's return on equity (RoE) target for 2017 "remains a challenge".Espirito Santo's BESI Research unit cut its target price on the stock from 770p to 635p, saying the bank is "running to stand still".HSBC strategy to redeploy risk weighted assets away from its Global Banking & Markets division and shift focus to Asia "looks sensible" given it is the most profitable region, BESI said.However, the broker said it still fails to foresee a significant increase in returns."Despite improving returns on RWA, the higher capital requirements (now common equity tier 1 ratio towards 13%), the continued drag from returns in Europe and North America suggests that HSBC is unlikely to achieve returns and growth of pure Asian banks," it said."Moreover, even though management say $12bn (19% of group) revenue synergies are enabled by the universal banking model, this does not appear to translate into superior returns than peers."BESI reckons that HSBC may struggle to meet its RoE target of 10% by 2017, saying "foreign banks have had limited success so far in Mainland China".The stock was down 0.5% at 587.6p by the close in London on Thursday.