HSBC 'Best Counterparty in Global Banking Today': Bernstein

NEW YORK ( TheStreet) -- HSBC Holdings PLC ( HBC) looks like quite a dividend play for investors, and BernsteinResearch also sees 17% upside for the company's shares.

American Depositary Shares of HSBC closed at $57.00 Tuesday, returning 7% this year, following a 48% return during 2012, when the company made a major move to pull out of the U.S. market, completing the sale of roughly 200 branches in upstate New York to First Niagara Financial Group ( FNFG) and other banks, and also selling its entire U.S. credit card portfolio to Capital One Financial ( COF).

Remaining U.S. loans have been placed in run-off and HSBC's impaired North American assets fell by 26% during the first quarter from the fourth quarter, to $447 million as of March 31. "This raises the potential for early repatriation of the excess capital stuck in the U.S.," Bernstein analyst Chirantan Barua wrote in a report to clients on Tuesday.

Barua added that "the bank can increase its dividend at least 30% this year given the fact that it has already met its high capital requirements and this would prove to be a strong catalyst for the stock."

That would be quite a significant event for investors, considering that HSBC's shares already have a dividend yield of slightly over 4%.

HSBC is headquartered in London. The company had $2.7 trillion in total assets as of March 31 and on Tuesday reported first-quarter earnings of $8.434 billion, increasing from $4.322 billion during the first quarter of 2012. According to Barua, the first-quarter profit before taxes and one-time items was "9% ahead of consensus expectations. The beat against consensus was primarily driven by 38% lower than expected impairments and 4% lower than expected operating expenses."

HSBC's first-quarter return on average equity was a solid 14.9%, improving from 6.4% a year earlier.

"Across all lines, we see these results as an endorsement of the strength of the franchise and its ability to generate earnings even in a sluggish macro environment," Barua wrote, adding "We see HSBC as the best Counterparty in global banking today with further upside potential as growth comes back and rates rise."

HSBC estimated that the bank's Basel III Tier 1 common equity ratio would be a strong 10.1%, "after planned management actions." The company reported a core Tier 1 capital ratio of 12.7%, increasing from 12.3% the previous quarter, "as a result of the completion of management actions and profit generation offset by the effect of regulatory changes."

The company also said "internal capital generation contributed US$3.0bn to core tier 1 capital, being profits attributable to shareholders of the parent company after a regulatory adjustment for own credit spread and net of dividends," although "this was largely offset by foreign currency translation differences resulting from the strengthening of the US dollar."

HSCB CEO Stuart Gulliver said in the company's earnings announcement that "we have strengthened our capital position and remain one of the best-capitalised banks in the world, allowing us both to invest in organic growth and grow dividends. Our strategic direction remains unchanged. Later this month we will update investors on the next phase of its implementation."

Barua's price target for HSBC's American Depositary Shares is $64.93. The analyst estimates rates the company "outperform," and estimates the bank will earn $7.49 a share for all of 2013, with EPS increasing to $8.36 in 2014.

"Our fundamental long view on HSBC has been based on its unique strategic position of being the only global bank with a strong counterparty rating and strong liquidity both in emerging and developed markets," Barua wrote.

The analyst added that "most importantly HSBC today is generating significant levels of cash that it cannot deploy within its risk appetite given the macro environment. Given the fact that the bank has already met its high regulatory capital hurdle, a natural return of cash to shareholders is due. "

HBC Chart HBC data by YCharts

Interested in more on HSBC? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Stocks

Markets Look Confused After Latest Beating

Markets Look Confused After Latest Beating

General Electric Expulsion From Dow Symbolizes Unsettled Week in Markets

General Electric Expulsion From Dow Symbolizes Unsettled Week in Markets

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In