HSBC Not Joining U.K. Bailout

We are continuing our Hold on HSBC Holdings, Plc (HBC). The company will report its third quarter trading update on November 10. We are maintaining our EPADS estimates at $6.75 for 2008 and $7.50 for 2009.

Earnings should reflect strong loan and deposit growth, especially in emerging markets, and improved productivity, partially offset by increased impairment charges due to problems in credit markets. Importantly, HSBC announced that it does not intend to take part in the UK government’s recapitalization program for banks as it already has sufficient capital.

In its first half report, HSBC posted net earnings of $7.7 billion, down 22% year over year. Weaker US profits due to higher impairments in consumer finance loans and additional write-downs in Global Banking and Markets offset solid results in HSBC’s emerging markets and European businesses.

At its current price, HSBC is trading at 12.4X and 10.8X P/E multiples of 2008 and 2009 consensus estimated earnings, respectively. These are above the industry P/E medians based on consensus earnings, as shown in the following table a premium we believe is justified by HSBC’s financial strength.

In addition, HSBC’s dividend offers an above-average yield of 6.1%, which partly compensates for the company’s below-average estimated five-year growth rate. We believe the stock is fairly valued at present and see limited near-term upside. Our $80 target price represents roughly a 10 ½X P/E based upon our $7.50 earnings estimate for 2009.

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