Broker tips: HSBC, CYBG, WPP

HSBC's pivotal Hong Kong arm faces losing corporate and retail banking market share to 'virtual banks', Citigroup warned on Tuesday, with loan growth potentially falling off a cliff in the third quarter.

Citi, which downgraded HSBC shares to 'neutral' from from 'buy' with a target price of 660p, pointed out that lending in Hong Kong has been dropping due to the slowdown in mainland China, exacerbated by the depreciating yuan and concerns about the US trade war.

Similar to many incumbent banks, HSBC has lost market share in Hong Kong, with its share of the loan market dropping to 23% in the first half of the year versus 27% in 2005, with the share of the deposit market down to 29% from 33%.

"Previously market share loss has been in corporate banking; looking ahead, we worry about retail banking disruption from virtual banks," the analysts wrote in a note to clients.

Third-quarter loan growth "could be negative" compared to the second, they said, with HSBC Asia, which accounted for more than three-quarter of HSBC’s first-half underlying profit before tax, forecast to see loan growth in 2018 judder to 6% from the 17% last year.

"What happens in HK matters directly for HSBC - and indirectly if Asia more broadly follows (e.g. slower loan growth)."

Barclays initiated coverage of CYBG at 'underweight' with a 280p price target on Tuesday as it said margins were likely to disappoint.

The bank's earnings estimates are around 10% below 2020 consensus on lower revenues, as it expects net interest margin to disappoint as it comes under pressure from asset margin compression and rising funding costs, with relatively limited support from rate hikes.

"Despite the recent sell-off, we still see the shares as expensive," Barclays said. It added that despite falling 26% from their recent peak, the shares trade at what it sees as an unjustified premium of around 30% versus Lloyds and RBS on an estimated 2020 price-to-earnings basis.

"With a likely sluggish UK macro, and little system growth, we expect mainstream challengers to struggle versus strongly capitalised, highly liquid incumbents (with legacy issues largely resolved) fighting for share in key challenger product lines, curbing challenger volume aspirations and squeezing margins," it said.

As far as CYBG's merger with Virgin Money is considered, Barclays said it likes the move but sees no real change to CYBG's competitive firepower.

Analysts at Credit Suisse lowered their target price on British advertising firm WPP on Tuesday as a result of lower than expected organic growth due to a recent speight of major account losses.

Credit Suisse dropped their target price on WPP to 1,200p from its previous 1,320p estimate after the FTSE 100-listed outfit suffered a string of account losses including Kimberly Clark, Ford, GSK, Amex, United Airlines and much of its Pepsi business.

The broker cut its 2018 growth estimates on WPP by 10bps to 50bps and its 2019 growth estimates by 80bps to 0.6%. CS also lowered its estimated full-year organic growth to 0.5% from 0.6%.

Taking into account previous restructurings from Publicis and WPP, Credit Suisse said that, moving forward, it expects to see more creative mergers, more offshoring, more property consolidation, a trimming of market research and a reinvestment in talent.

Credit Suisse said: "With potential restructuring at 3-5% of sales this would lower FCF (pre-savings) by 9-14%. Current valuation likely already reflects potential restructuring: the greater uncertainty lies in growth levels."

The Swiss broker kept its 'neutral' rating on the stock unchanged.