HSBC Holdings: Strong Asian Capital Flows; ROTE Expected to Reach 20% by 2028

Overview

Morgan Stanley has issued a research report, reiterating its ‘Overweight’ rating on HSBC Holdings (0005.HK) and setting a target price of HK$155.20, based on feedback from an Asia-themed investor conference. The report’s key takeaway is that, driven by robust capital inflows into the region—including new wealth management clients, Asian trade flows, and RMB internationalization—HSBC’s growth prospects in Asia are becoming “stronger and more sustainable.” Coupled with enhanced operational agility following the company’s structural streamlining, the firm projects HSBC’s tangible equity return on capital (ROTE) could reach 20% by 2028. Although net interest margins (NIMs) are under pressure as the interest-rate cycle peaks, non-interest income growth and sustained capital returns are expected to underpin earnings performance.

Core views

Wealth management boasts robust growth prospects: Hong Kong’s IPO pipeline has fueled strong net inflows in the first quarter, and near-term momentum remains firm. More structural tailwinds—such as wealth creation on the mainland, the shift of savings into financial products, and rising demand for international diversification—underpin long‑term capital inflow growth. Boston Consulting Group projects that by 2029, Hong Kong will surpass Switzerland as a global wealth hub. HSBC still has room to expand its wallet share: since 2023, non‑resident new clients from the Chinese mainland have tripled, accounting for the bulk of the 1.1 million new wealth management customers. Management estimates Hong Kong’s total addressable market (TAM), including mainland clients, at 70 million, compared with a current base of just 7 million. Given China’s high 35% savings rate and an average client “maturity” period of around 36 months, the benefits will gradually materialize over the coming years. Moreover, 65% of wealth management clients do not yet hold wealth products, and investments in the product pipeline should further boost wallet share. Global Banking and Markets (GBM) activity is being driven by supply chain realignment: Asia has now become the world’s largest trade corridor, with supply chains and trade‑related investment serving as key engines of long‑term loan growth. Clients from the Chinese mainland are expanding their footprint across more geographies and leveraging a broader range of products, contributing twice as much to HSBC’s profitability as they did previously. In fiscal year 2025, GBM deposits grew by 9%, with 80% held in transactional accounts, underscoring the high quality of the business captured. While the bank assumes a moderation to 4% growth by year‑end, there are currently no signs of a slowdown in activity. Cost simplification and asset quality improvements: The company’s targeted $1.5 billion in simplification synergies are largely expected to be realized in the second quarter. The CEO noted that $1.4 billion in cost reductions was essentially completed six months ahead of schedule, with additional savings still available through Hang Seng Bank and further streamlining of operating models. On the asset quality front, although Hang Seng Bank’s credit cost ratio (CoR) stands at 100 basis points for FY2025, rising residential prices (+5%), stronger retail spending (+10%), and declining vacancy rates suggest that Hong Kong’s commercial real estate (CRE) cycle has bottomed out. This has bolstered market confidence that the group’s CoR could fall to 40 basis points or lower over the next few years. While non‑performing loan (NPL) disposals remain gradual, liquidation proceeds point to improved capital efficiency over the medium term.

Analysis framework

The institution employs a probability-weighted valuation approach to derive its target price: based on the likelihood of different macroeconomic outcomes, it constructs bullish (30%), baseline (65%), and bearish (5%) scenarios. Scenario valuations are derived using a three-stage Gordon Growth Model, which discounts the present value of five-year projected dividends, the present value of implied dividends during a ten-year recessionary period, and the terminal book value. Equity cost of capital (CoE) is assumed at 10%, with a terminal growth rate of 2.5%. The analytical framework centers on “revenue growth + cost control + capital returns”: first, it confirms the certainty of non-interest income growth driven by structural capital inflows into Asia; second, it assesses progress in implementing cost‑streamlining initiatives and their impact on margins; finally, it evaluates how the stabilization and rebound in asset quality are easing provisioning pressures. By comparing these findings with consensus expectations, the institution has grown more confident in non‑interest income growth—particularly in wealth management and corporate banking—and anticipates that medium‑term cost growth will be contained around 3%. It also expects to maintain a 50% dividend payout ratio and to execute share repurchases of $7–12 billion annually starting in 2026.

Methodology notes

• Valuation MethodologyDDM Dividend Discount Model

  Three-Stage Gordon Growth Model

  The research report employs a three-stage dividend discount model for valuation, separately calculating the present value of near-term dividends under explicit forecasts, the implied dividends during the intermediate transition period, and the terminal value in the long term. This approach is well suited to mature bank stocks with stable and predictable dividend payouts.

• Financial industry-specific metricsNet Interest Margin (NIM) Analysis

  Interest Rate Cycles and NIM Pressures

  The research report notes that the interest-rate cycle has likely peaked, putting net interest margin (NIM)—a key metric in banking analysis—under headwinds. This implies that banks will need to rely on non-interest income to offset the impact of narrowing NIMs.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  Return on Capital and Shareholder Returns

  The research report underscores that enhancing shareholder returns through substantial share buybacks—ranging from $7 to $12 billion annually—and a stable dividend payout ratio of 50% constitute key metrics for assessing the investment attractiveness of mature financial institutions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• HSBC Holdings (0005.HK)

  Beneficiary targets: Asian capital inflows, cost streamlining, and improved asset quality directly enhance their profitability and valuations.

  Strengths

  Leading position in Asian wealth management, a robust cross-border trade network, an accelerated cost-reduction plan that has been completed ahead of schedule, and ample capital available for share buybacks.

  Weaknesses

  The net interest margin (NIM) is under downward pressure following the peak in interest rates.

  Comparison

  Compared with its peers, HSBC has a larger exposure to the Asian market and stands to benefit more from wealth growth and trade flows in the region.

  Risks

  Slowing global economic growth has heightened credit risks, reignited macroeconomic risks in China, intensified geopolitical and tariff-related tensions, and led to steeper-than-expected declines in interest rates.

Key data

• Target PriceHK$155.20Based on probability-weighted valuation, the stock implies approximately 9.5% upside potential.
• 2028 Expected ROTE20%Return on tangible equity reflects the efficiency gains resulting from structural streamlining and earnings growth.
• Cost Simplification and ReturnsUS$1.4 billionThe majority of the pledged US$1.5 billion target has already been achieved, with completion six months ahead of schedule.
• Mainland Non-Resident New ClientsTripled in growthSince 2023, they have accounted for the majority of new wealth management clients.
• CIB deposit growth9%Fiscal year 2025 data, with 80% consisting of high-quality trading accounts.
• Expected Share RepurchaseUS$7.0–12.0 billion per yearStarting in 2026, it will underpin stock performance.

Impact & implications

The research report argues that HSBC Holdings’ structural growth story in Asia is unfolding, particularly in wealth management and cross-border trade finance. With the implementation of cost‑streamlining measures and stabilization in asset quality, the company’s return on tangible equity (ROTE) has significant room to improve. For investors, this means that even in a rate environment potentially unfavorable to net interest margins, HSBC can still deliver robust returns through non‑interest income and efficient capital allocation. Key upside risks to earnings stem from stronger‑than‑expected growth in wealth management fees and CIB revenues.

Risks

• Global economic growth has fallen short of expectations, leading to heightened credit risks.
• China’s macro risks are resurfacing.
• Geopolitical and tariff tensions have intensified.
• Interest rates have fallen more than expected, further narrowing the net interest margin.
• Another shock event has occurred in the Middle East.

What to watch

• The net inflow of funds into the wealth management business remains sustained.
• The growth trend of CIB’s fee income
• The sustained positive performance of the cost-to-income ratio (JAWS)
• Further clarification of the asset quality of Hong Kong’s commercial real estate (CRE) sector.
• The implementation intensity of the share repurchase program