By Patrick Jenkins in London

Published: April 20 2011 23:03 | Last updated: April 20 2011 23:03

HSBC’s new chief executive is preparing a radical shake-up of the normally staid bank, slashing costs and reallocating capital in an effort to boost profitability and also resuscitate its flagging US operation.

Stuart Gulliver, HSBC’s former investment banking head who took charge of the whole group in January, has told associates he is determined to overhaul the culture of a group that has sometimes been run as a loosely connected federation of local fiefdoms.

Put simply, 72% of the HSBC balance sheet produced ROE below 10% in H2 2010. We estimate that if Gulliver is serious about ensuring all businesses generated ROE at 10% or better then share price scenarios are in the region on 950p.

Talk of disposals is very encouraging.
The FT floats the idea that the US cards business might be sold. At $27bn of assets and $2bn of PBT this is a material book and, on a very back of the envelope basis, could be worth c.$20bn (although as we don’t know the carrying value we don’t know likely gains/losses to equity).

Target prices in this range are supported by dividend estimates. If we (and consensus) are correct that HSBC will pay a 62c dividend in 2013 this would equate to a 956p share price at the 4% long run dividend yield.

HSBC underperformed Standard Chartered by 69% between 2002 and 2010 as HSBC ROE weakened. If HSBC is about to embark on a root and branch review of the groups equity and ROE structure the stock has the potential to be a hugely successful restructuring play. We believe institutions should be overweight.

It has been our view for a while that Greece, in agreement with its EMU partners, would attempt to undertake a liability management exercise on its sovereign debt, most likely involving a ‘voluntary’ maturity extension of at least part of the medium and long-term bonds coming due in 2012-15 (cumulatively amounting to some EUR250bn). Here we spend a few lines reviewing our thoughts on the matter, and try to understand what could have recently led to an escalation of talk on the occurrence of such an event.

On the assumption that the severe fiscal adjustments agreed with the EC and the IMF are fully delivered, and that EUR5.5bn worth of privatizations receipts are collected, Greece is projected to have a debt-to-GDP ratio of around 160% by end-2012. The sustainability of such a high debt stock is understandably the subject of an intense debate. But the economy’s medium term growth trajectory – a key factor in any sustainability assessment – is hard to know based on today’s information (the IMF assumes a figure in the ball park of 2.5% in real terms).

In March, the full repayment of funds provided through bi-lateral loans was extended and the interest reduced. This makes it less burdensome for the country to generate enough savings to pay back its EMU partners, which rank pari passu with existing bondholders. However, the adjustment program currently envisages that, already next year, Greece will have to return to the market and raise around EUR40bn in order to roll over 76% of maturing bonds, and meet coupon payments. Crucially, around two-thirds of these disbursements will end up in the hands of foreign creditors, mostly financial institutions in the Euro area.

The IMF’s third ‘program review’ (released in March) highlights this as a ‘notable risk’ – it may prove difficult for the Greek government to re-access markets before the economy and debt dynamics have turned the corner. The price action over the past week (2-yr Greek bonds trade at 75c, or a 20% yield) suggests that such a risk may already have become reality. This argues in favor of at least buying Greece more time to show it can deliver.

We have not been specific about timing, but have indicated action of any sort would probably come next year, when the Greek primary fiscal balance will probably have swung into surplus, the economy may have stabilized and external conditions further improved. The intensification of talk of an adjustment, including (crucially) statements in this direction from German officials, could be indicative of the fact that some form of burden sharing has become politically palatable both from the Greek side (as the authorities prepare to push more measures through Parliament), and for some EMU members (in which the question of why tax-payers’ money should be used to make financial institutions whole on their past investments is being more frequently asked). Finally, the new round of bank stress tests this June could offer regulators the opportunity to encourage financial institutions to enter into liability management negotiations.

Admittedly, carrying out a liability management exercise is a complex matter and carries several risks. The legal intricacies have been discussed by Mitu Gulati and Lee Buchheit (see: Duke Law working paper no. 47, 2010). More generally, there is the question of how to minimize any ‘contagion’ effects to other program countries and beyond (we have emphasized that Greece is in a league of its own in Euroland and that Ireland and Portugal would not be impaired). And if NPV ‘haircuts’ are contemplated, rather than the re-profiling of a portion of existing bonds as we have in mind, the question is how to calibrate the exercise so that the market agrees that this represents a resolution to the issue of concerns over debt sustainability, and not the start of a sequence of adjustments.

They estimate that the impact would be manageable for banking institutions in Germany and France (representing 5% of Tier 1 capital in the former, concentrated in a few institutions some of which are backed by the government, and around 2% in the latter), and thus not represent a threat to the stability of the financial system. Clearly the hit on the Greek banks based on such a large restructuring assumption would be commensurately big (wiping out 80% of Tier 1 capital or equivalent to 160% of current market cap).

This indicates that any transaction would need to be designed extremely carefully and give consideration to the impact on domestic institutions, with the ECB fully on board continuing to extend funding assistance. Further uncertainties relate to ‘second round effects’ and potential exposure of non-bank financials (estimated to amount up to EUR50bn). Funds diverted from repaying foreign creditors in full and on time, be it through debt exchanges or haircuts, could be used to further bolster the capital base of the Greek institutions

The latest John Lewis retail sales data were also released this morning – they show that for the first 11 weeks of John Lewis’ financial year, retail sales values including VAT were 1.9% higher than the same period a year ago. However, excluding VAT, growth was only 0.1%.

This is a bullish and confident statement that supports our central Buy thesis that William Hill has strong growth prospects across both retail and online, with low leverage supporting shareholder comfort, investments (such as the recent land-based, regulated US sportsbook acquisitions) and an attractive dividend. Trading at just 9x FY11E P/E and 6x EV/EBITDA, we retain a Buy on the stock with a 270p share price target.

1Q group net gaming revenue (NGR) was up by 11%, with EBIT growing by an impressive 21%.

Critically, William Hill is seeing excellent growth across the group, supporting our view that both retail and online gambling offer attractive growth prospects.

Online NGR in 1Q was up 26%, driven by the sportsbook (+54%, despite horse-racing and singles betting-led margin decline of 80bp to 7.3%), but assisted by good growth in both poker (+16%, bucking negative industry trends) and casino (+13%), as well as 30% bingo upside YoY. Online EBIT growth was 28% (small margin uptick) to £29.8m.

Net debt has reduced to £458m (vs £499m at FY10A), implying a net debt/EBITDA of just 1.5x and supporting a high dividend payout (forecast yield 4.5% to FY11E).

Further, tax guidance has been dropped by 4% pts to just 18%, implying an immediate c5% enhancement to our FY11E EPS (21.25p to 22.34p).

We have a Buy on the stock, with a 270p share price target implying 36% upside.

Nowadays we use as a benchmark the intraday prices on the OTC market in London — by far the biggest and most traded precious metals market. However, in 1980 the data on this market was much less precise, since it wasn’t traded electronically.

After some discussion, Javier and I have concluded that anything above $50 should be considered a record high, and we should include the following sentence in the story:
“The market considers that $50 an ounce marks a record nominal high for silver, although veteran traders say that in the chaotic trading of January 18, 1980, when the Hunt brothers’ cornering of the market came to a head, some small amounts of the metal changed hands in the physical market at even higher prices. The large precious metals banks, which have been meeting daily to set prices for silver since 1897, on that day recorded a “fixing” — or daily benchmark price — of $49.45.”