HSBC Shares (LON:HSBA) Downgraded on Hang Seng Bank Acquisition Concerns

HSBC shares (LON:HSBA) experienced a turbulent trading session, falling more than 5% yesterday following the announcement of its proposed acquisition of the remaining stake in Hong Kong's Hang Seng Bank. The market reacted negatively to the news, prompting Jefferies to downgrade its rating on HSBC stock, even as the firm raised its price target.

HSBC shares fell 5.38% during Thursday's trading, reversing after what has been a strong year for bulls, with HSBA 28.16% higher YTD. This downturn was triggered by the announcement of HSBC's plan to acquire the 36.5% stake in Hang Seng Bank that it doesn't already own, offering HK$155 per share.

The proposed deal values Hang Seng Bank at approximately HK$290 billion (US$37 billion), representing a 30.3% premium over its recent share price. 

Jefferies downgraded HSBC to “Hold” from “Buy,” while simultaneously increasing the price target from 960 GBp to 1,120 GBp. This seemingly contradictory move stems from reservations about the terms of the Hang Seng Bank acquisition. Jefferies analysts suggest that there might be more effective ways to deploy the $13.7 billion allocated for the deal.

The firm is “not enamored” with the acquisition strategy, indicating concerns about the potential return on investment compared to other possible uses of capital.

HSBC intends to finance the acquisition by temporarily pausing its share buyback program for roughly three quarters. The bank anticipates a temporary reduction of 125 basis points in its Common Equity Tier 1 (CET1) ratio before returning to its target levels. This decision reflects the significant capital outlay required for the Hang Seng Bank deal and its potential impact on HSBC's capital reserves.

Despite the market's initial skepticism, HSBC's CEO, Georges Elhedery, has stated that the bank remains open to further acquisitions in key growth areas, including Hong Kong, the UK, transaction banking, and wealth management. This suggests a continued focus on strategic expansion, even as the bank navigates the complexities of the Hang Seng Bank acquisition. The CEO emphasized that the acquisition is a strategic decision aimed at streamlining operations and enhancing shareholder value, rather than a bailout.

Analysts have voiced concerns regarding the timing and valuation of the deal, particularly in light of Hang Seng Bank's recent challenges with rising bad loans linked to the volatile property markets in Hong Kong and mainland China. These concerns add further weight to the market's negative reaction and the subsequent downgrade from Jefferies.

The downgrade, coupled with an increased price target, underscores the mixed sentiment surrounding HSBC's strategic direction. While the price target suggests potential for future growth, the “Hold” rating reflects caution about the near-term impact of the Hang Seng Bank acquisition. The market's initial response indicates that the acquisition has introduced significant uncertainty, potentially affecting investor sentiment.