Citigroup: HSBC Holdings' Adjusted Pretax Profit Exceeds Expectations Last Quarter, Target Upgrade Expected to Drive Positive Re-rating

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Citigroup has issued a research report maintaining a "Buy" rating on HSBC Holdings (00005) with a target price of HK$143.3. HSBC's fourth-quarter underlying pretax profit, excluding significant items, for the 2025 fiscal year reached $8.6 billion, surpassing market consensus by 9%. Revenue exceeded expectations by 3%, costs were in line with forecasts, and impairment losses were 12% better than anticipated. The revenue outperformance was primarily driven by net interest income from the banking business, which was 6% above expectations, while non-interest income was broadly in line, coming in 1% lower. Due to lower-than-previously-guided losses from the sale of the French mortgage portfolio, reported pretax profit stood at $7.8 billion, significantly exceeding market consensus by 18%. The Common Equity Tier 1 ratio was 14.9%, increasing by 40 basis points quarter-on-quarter and surpassing consensus by 20 basis points, even after accounting for a dividend of $0.45 per share, which was 7% higher than consensus. On a pro forma basis following the privatization of Hang Seng Bank, the ratio would decrease to 13.8%. The group has provided guidance indicating that the transaction is expected to deliver $500 million in incremental synergies, whereas Citigroup believes market consensus assumes minimal synergies. The group has raised its targets, now expecting a return on tangible equity of 17% or higher for the 2026 to 2028 fiscal years, compared to a market consensus range of 16.6% to 17%. Overall, this represents a strong earnings report, with reassuring strategic updates, useful new information regarding Hang Seng Bank, and raised targets that are expected to drive a positive re-rating.

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