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Investing.com -- HSBC Holdings (LON:HSBA) has been downgraded to "neutral" from "buy" by analysts at Citi Research, with the price objective reduced to 930 GBp, from 960 GBp, in a note dated Tuesday.
The stock is currently trading at 873.20 GBp, reflecting a balanced risk-reward profile. While Citi Research remains confident in HSBC’s franchise and its management’s efforts to improve the bank’s long-term proposition, the analysts note that the risks, both upside and downside, are now more evenly matched.
The key concerns for Citi Research include the trajectory of U.S. interest rates and the potential for renewed tariff tensions.
Another challenge is the possibility of a prolonged period of lower Hong Kong Interbank Offered Rate (HIBOR).
Although each of these risks is manageable individually, they collectively underscore the difficulties faced by one of the world’s largest trade banks amid ongoing global economic instability.
The most crucial recent development is the sharp drop in HIBOR. The 1-month HIBOR rate fell from about 4% at the beginning of May to as low as 0.6%, and it has remained near zero for over a month.
Citi estimates that for every month HIBOR stays at these levels, HSBC could lose around $200 million in banking net interest income (NII), along with a 0.1% reduction in return on tangible equity (ROTE).
In their base case, Citi expects the 1-month HIBOR to remain subdued, settling at 2.4%-2.6% from the third quarter of 2025 through the end of 2026. This forecast aligns with the views of their Asia FX strategist.
The downgrade also reflects expectations of reduced capital distributions. Citi continues to expect a $11 billion buyback in 2025 but now forecasts a lower buyback of $9 billion for both 2026 and 2027, broadly in line with consensus estimates.
The revision is attributed to lower profit projections, higher loan growth, and management’s likely cautious stance due to ongoing macroeconomic uncertainty.
While HSBC’s total yield, above 10% per year, and its 6% dividend yield remain attractive, Citi sees more potential for upside from local Hong Kong banks in terms of capital returns.
Despite these challenges, Citi Research acknowledges HSBC’s strong capital generation ability and its continued focus on enhancing its long-term prospects.
However, given the current macroeconomic backdrop, the bank’s valuation does not appear particularly cheap compared to its sector peers.