Morningstar: HSBC Profit to Dip in 2025 Before Rebounding
HSBC’s ambitious cost reduction plan is forecasted to result in a profit drop in 2025 before rebounding in 2026, according to a note by Morningstar.
In its latest announcement of its 2024 results, HSBC unveiled plans to reduce $1.5 billion in annual costs by 2026 with involving an 8 percent cut in staff expenses. The bank noted that this is expected to result in $1.8 billion of severance and other up-front costs to be incurred over the next two years.
According to a Morningstar note authored by senior equity analyst Michael Makdad, the one-time severance expenses are forecasted to result in slightly lower profit in 2025 before returning to growth in 2026 with the cost reduction to boost net profit by about 4 percent in the future.
Top-Line Growth Limited
While the bottom line may improve from the cost-cutting exercise, Makdad believes there is limited room for top-line growth in the next few years.
«Loan demand in HSBC's key market of Hong Kong remains weak and average net interest margins across the group are unlikely to return to 2023 levels due to lower interest rates in Europe,» he commented.
Focus on Medium-Term Gains
Based on the cost reduction plans and a higher path for US dollar interest rates than previously anticipated, Makdad estimates that there is approximately a 10 percent upside for HSBC’s Hong Kong and London-listed shares from the current levels.
«For HSBC to achieve a substantial premium to book value, we believe further structural changes would be needed. However, given the complexity of HSBC's operations, we think it’s prudent for management to focus on medium-term efficiency gains rather than more disruptive overhauls,» he added.
