Bank of America Merrill Lynch has taken a less bearish view on global banking group HSBC and moved its recommendation from 'underperform' to 'neutral'.

The broker said that its previous rating was built on concerns surrounding concensus earnings, the drag of increasing capital on organic growth and valuation.

BofA said: "While we remain concerned about the return on equity capacity of HSBC, it has done an outstanding job in improving capital ratios, something that the market has placed a lot of value on.

"With the US economy continuing to surprise on the upside the market may place more weight on the interest rate optionality embedded within HSBC."

The broker said that reservations remain about near-term consensus estimates for earnings per share (EPS), as well the improvement in the US economy, the capital path is "now clear".

"With the FY12 accounts showing that every 25 basis-point parallel shift in the yield curve could add $1.4bn to revenue and the capital position now extremely strong, we are willing to put more emphasis on dividend and rate optionality, than the threat of continued EPS downgrades."

The target price has been raised from 650p to 755p, reflecting an increase in capital.

Despite the upgrade, shares were down 0.6% at 699.6p in morning trade.

BC

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