We're reducing our valuation of HSBC (HSBA) by 50p per share as we incorporate slower near-term growth into our forecasts. Our fair value estimate is now 650p, which is equivalent to 1.1 times book value and 1.3 times tangible book value as of mid-2015. We expect HSBC's revenue to fall 2% in 2015 and to grow at a compound annual growth rate of 6% in the medium term on growth in Asia and Latin America and the normalisation of the interest rate environment.
We think HSBC has a narrow economic moat, meaning it has a moderate ability to sustain its competitive advantage. It is one of the world's five largest banks, operating large business and retail banks in the UK as well as the largest bank in Hong Kong. We think HSBC's moat is built on its huge low-cost deposit base and its reasonably low-cost operations, with costs consistently consuming less than 60% of revenue.
Now that bad-debt charges in personal finance, especially in North America, are subsiding, our gaze is turning toward Asia, where competition is intensifying and compensation costs are rising. HSBC is refocusing its business on the region as China's growth slows, and earnings could be volatile.
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