Why HSBC lost its 'buy' rating

HSBC has had an incredible run this summer. Almost untouched by Brexit, shares in the Far East focused bank are up 24% since 23 June and 17% since half-year results at the beginning of August. That's put rivals to shame, but the bank is no longer cheap and the valuation is a bit spicy.

Investors in mainland China have been chasing HSBC shares Hong Kong stock recently, hopes of further share buybacks are high, and it's quite likely that punters have seen HSBC as a "low risk" way into a "value" sector.

Now, a forward price/earnings (PE) ratio of 12 times based on earnings estimates for 2016 is near six-year highs. It drops to 11.3 times on 2017 forecasts, but that's a healthy premium to European peers and American lender Citi.

And broker UBS thinks HSBC shares are up with events. "We see little in the operating environment and conversations with investors to justify a further re-rating of the stock in the near term," says analyst Jason Napier.

Napier came down hard on the banks in a note published in July. He slashed earnings per share forecasts across the UK sector to factor in a post-referendum shift in UBS's domestic macro outlook from "decent expansion to juddering halt".

Lower interest rates and more cautious lending, lower loan growth and higher bad debts would hit margins, Napier warned as he downgraded Barclays from 'buy' to 'neutral'. But, with the shares at 484p, he kept HSBC as a 'buy' and increased the price target from 480p to 535p. Good call.

Now, with "modest capital downside offset by dividend yield," he cuts HSBC to 'neutral', but nudges the price target up 5p to 540p to factor in currency changes. That implies about 20p downside from here. However, Napier does not see HSBC's re-rating as excessively overdone either.

"We don't think HSBC is a 'sell'," he says. "Recent results confirmed progress on costs and sufficient confidence on capital to confirm plans to pay a 51 cents per share future dividend - a running yield of 5% net of scrip - and launch a $2.5 billion (£1.9 billion) share buyback paid from the proceeds of the Brazilian disposal.

"On the analyst call management suggested, we think, that another buyback may be forthcoming if HSBC succeeds in releasing capital trapped in the US since the Capital One sale in 2012. In a world of low yields and capital concerns, we view decent income and non-UK exposure as attractive features of the stock."

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