Credit Suisse initiates coverage of UK banks; HSBC named top pick
Credit Suisse has initiated full coverage of the UK banking sector, upgrading HSBC to ‘outperform’ in the process.
The Swiss bank, which previously had a ‘neutral’ rating on the blue-chip stock, said HSBC was at a “pivotal stage, with all the pieces in place to make Strategy 2020 a success”.
Analyst Claire Kane continued: “Our detailed review of HSBC’s cost base leads us to conclude that management has yet to address the structural inefficiencies within the group. This presents a key opportunity for the new management team to drive return on tangible equity above 11% by the 2022 full year, leading to a re-rating of the shares.”
HSBC is due to publish full-year results on 18 February, and interim chief executive Noel Quinn is expected to announce a strategic overhaul of the bank at the same time.
Credit Suisse is expecting Quinn to announce a cost-saving target of $6bn by 2022, leading to an absolute cost reduction of around $2bn. “We forecast net cost savings to come principally from the UK head office, which we estimate increased by around 30% during Strategy 2015,” said Kane. “A reduction in management layers and back-office personnel should limit the revenue loss relative to the previous restructuring.”
Credit Suisse initiated coverage of Royal Bank of Scotland with an ‘outperform’ rating and a price target of 260.0p, and Lloyds Banking Group and Barclays with ‘neutral’ ratings and price targets of 60.0p and 185.0p, respectively.
However, it has rated Standard Chartered ‘underperform’ with a price target of 600.0p. Credit Suisse explained: “we expect revenue-driven earnings downgrades to resume around the full-year 2019 results, as we expect management to push out its 10% ROTE target beyond 2021.
"We are sceptical on how much management can cut costs to offset revenue pressure…and despite a recent pullback, the shares have re-rated on a 12-month view, outperforming the sector by 5%.”