FTSE dips as 'value trap' HSBC slips

HSBC is "sleepwalking towards a break-up" as a lack of action puts this year's dividend at risk, according to Macquarie analysts.

"The costs of running a global business has started to exceed potential network benefits for HSBC," the broker told clients. "A break-up into an Asia-Europe [bank] would generate significant shareholder value but the way towards a break-up will likely be painful."

A restructuring begun in 2011 has failed, leaving HSBC a complex and capital-hungry bank that is subscale in nearly everywhere except Hong Kong, argued Macquarie. Poor profitability and litigation costs will force management to drop its commitment to paying a "progressive" dividend, which could be the last straw for many investors, the broker argued.

Macquarie's solution was for HSBC to shed $500bn of risk-weighted assets, or about 40 per cent of the total. That would involve exiting America, the Middle East and north Africa entirely, as well as shrinking its global banking & markets division and shutting sideline businesses such as insurance.

"We believe that HSBC in its current form could be a value trap," the broker concluded. "Assuming no radical strategic change, we believe that the dividend is significantly at risk."

HSBC closed 1.4 per cent lower at 632.3p, costing the FTSE 100 nearly 7 points. The index ended 0.2 per cent lower, down 16.97 points at 7,029.85.

Royal Mail led market gainers, up 3.9 per cent to 497.9p, after PostNL's Whistl division halted its attempt to break the UK doorstep letter delivery monopoly.

"Given that Whistl delivers circa 0.6 per cent of the addressed mail market, the revenue benefit for Royal Mail remains very small - but the news should be positive for sentiment," said Credit Suisse.

Hikma, the generic drugmaker, bounced 2.2 per cent to £20.54 after Stifel advised using recent weakness as an opportunity to buy. Products gained via Hikma's purchase last year of Bedford Laboratories can offset disappointing sales so far of the colchicine gout drug, it said.

Aberdeen Asset Management edged 0.4 per cent lower to 450p after SocGen downgraded to "hold".

While the potential for more cash returns has been priced into Aberdeen shares, earnings downgrades look likely given the weak performance of key funds, said SocGen. "Without a turn in the negative emerging market sentiment, the exact source of which is not necessarily apparent, the scope for a re-rating beyond the sector average levels looks limited to us," it said.

Greene King fell 1.5 per cent to 804.5p and Spirit lost 1.1 per cent to 111.7p after the Competition and Markets Authority said their merger may affect 16 local markets.

"When Punch Taverns and Enterprise Inns reached their peak sizes of greater than 9,000 pubs, disposals of pubs in specific areas were relatively common, so we do not believe that selling pubs in these 16 areas will be sufficient to block the company's desire to complete this merger," said Barclays.

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