HSBC Holdings' earnings feared to stagnate in the near term

The need for further significant restructuring cited.

It has been noted that a combination of higher capital requirements, macro headwinds and the need for further significant restructuring led Barclays to downgrade its earnings expectations for HSBC Holdings by 12-16%.

According to a research note from Barclays, it now expects limited growth in earnings and dividends in the near to medium term as HSBC tackles increased structural challenges and seeks to build capital.

Further, Barclays sees achieving an RoTE of more than 12% in 2018 as dependent on the ability to cut costs by more than 5% that year.

Here's more from Barclays:

Earnings, returns and dividends stagnating near term: As a result of an increase in required capital levels HSBC has effectively embarked on another three year restructuring plan which, although needed, could be significantly disruptive both in terms of the need for cost cutting but potentially also a rethink of the businesses that HSBC is in.

At the same time, HSBC needs to build capital to a higher level than previously anticipated which is likely to both slow growth and restrict the dividend potential. As a result we see underlying EPS under pressure again in 2015 before resuming modest growth in 2016 and accelerating from 2017.

This sees RoTE stuck at 10-11% up to 2017 and we now believe that HSBC only has the capacity to deliver nominal dividend growth (1c a year) and meet its capital target.

Asia headwinds increasing: Hong Kong has for the past 6 years been a cheap funding center for Chinese corporates and HSBC's cross border lending business has been a key beneficiary of this trend. HSBC's loans in Hong Kong and China rose by 15% CAGR between 2008-2014. However, this trend is set to reverse with monetary easing in China underway and eventual interest hikes in the US.

Structural challenges: We highlight the Global Banking and Markets business as the main driver of low returns within the group and the Americas as the weakest regions. As a result we expect selective restructuring with management indicating that there could be significant change over the next two years.

Higher capital requirements slow dividend progression: HSBC now targets a 12-13% CET1 ratio and we forecast them building from the current 11.1% to 12.4% by 2018. However, this requires both slower balance sheet growth and much less dividend progression than we had previously anticipated.