HSBC earnings disappoint

Europe’s largest bank fell short of expectations as revenue declined and they didn’t cut enough costs. The economy is begining to recovery but not fast enough for the bank to  meet its targets.

Bloomberg’s Howard Mustoe and Gavin Finch had this story:

HSBC Holdings Plc (HSBA), Europe’s largest bank, posted full-year profit that missed analyst estimates as a cost-cutting drive fell short of targets and revenue shrank. The stock slumped in Hong Kong and London.

Pretax profit for 2013 rose 9 percent to $22.6 billion from $20.7 billion in the year-earlier period, the London-based bank said in a statement yesterday. That was lower than the $24.6 billion median estimate of 30 analysts surveyed by Bloomberg. HSBC’s Hang Seng Bank Ltd. (11) unit in Hong Kong posted record earnings for the year, boosted by an accounting gain.

HSBC, which gets most of its profit from Asia, is focusing on the most lucrative markets amid increased regulation and compliance costs. While Chief Executive Officer Stuart Gulliver has closed or sold 63 businesses since 2011, costs are running above his target of about 50 percent of revenue, while return on equity, a measure of profitability, is still short of his goal.

“The miss is driven by revenue softness and costs not falling as much as expected,” said Ian Gordon, an analyst at Investec Plc in London with a buy recommendation on the shares. “The dividend is also below expectations.”

The Reuters story by Steve Slater and Matt Scuffham pointed out that HSBC makes most of its money in Asia and is looking to find a way to offset that as the economy slows:

Gulliver is under pressure to show how HSBC can replace income lost from the sale of U.S. businesses and a stake in a Chinese insurer, and worries that Asia’s economic growth is slowing.

He remained optimistic about longer-term prospects for emerging markets, which have been hit hard by a U.S. decision to wind down stimulus measures, but warned of “greater volatility in 2014 and choppy markets”.

He predicted China’s economy would grow by 7.4 percent this year, Britain’s should expand by 2.6 percent, the United States by 2.5 percent and western Europe 1.2 percent.

HSBC reported 2013 pretax profit of $22.6 billion, up from $20.6 billion in 2012 but below the average forecast of $24.3 billion in a Thomson Reuters poll.

Shutting businesses hit the bank’s revenues, which fell 5 percent. Stripping out the impact of disposals, underlying revenue was $63.3 billion, up from $61.6 billion.

Margot Patrick and Max Colchester wrote for the Wall Street Journal that HSBC could also be hurt by rules requiring it to hold more capital:

Chief Executive Stuart Gulliver warned that rising capital requirements could hinder the bank’s ability to ever hit the upper end of its 12% to 15% return-on-equity target, a measure of how much profit a company generates from shareholder funds. He also dashed hopes of a share buyback in the near term by saying he didn’t think it would happen in 2014.

HSBC, with $2.7 trillion in assets, is regarded as one of the world’s most stable banks because of its strong capital ratios and exposure to rapidly growing emerging economies. Mr. Gulliver said on Monday the bank has succeed in becoming “leaner and simpler” since starting a restructuring in 2011 that included exiting 63 businesses and shedding tens of thousands of jobs.

But analysts have been concerned about the bank’s ability to hit its return targets and jump-start revenue growth in an uncertain global economy. Return on equity in the year was 9.2%, up from 8.4% in 2012. The bank missed its cost-efficiency target, too, and said both figures had been affected by repayments to U.K. customers who were wrongfully sold insurance on loans and credit cards.

Profit before tax fell in many of the regions where HSBC operates. In Asia Pacific excluding Hong Kong, pretax profit slipped to $7.76 billion from $10.45 billion. Latin America pretax profit fell to $1.97 billion from $2.38 billion. The decline was offset, though, by a better performance from Europe, where last year’s $3.41 billion pretax loss swung to a $1.83 billion gain.

Andrew Peaple wrote in the Heard on the Street column that HSBC is working hard to get, well, nowhere:

Moreover, HSBC’s balance sheet is in decent shape, with core tier one equity up to 10.9% of its risk-weighted assets. The rising dividend could eventually be accompanied by share buybacks: HSBC will seek shareholder approval for that this spring.

Still, the problem for HSBC is that since 2011 it has effectively been running hard to stand still. It has promoted itself as a key beneficiary of global growth thanks to its expertise in trade finance. But with emerging-market growth increasingly checkered, it’s getting harder to judge HSBC’s revenue outlook. On the expense side, the low-hanging fruit of lower loan provisions, cost savings and decreasing regulatory fines can only be plucked so often.

And that’s really the point investors should think about – that cost cutting and capital management isn’t the talk of a growing company. Those are measures that stagnant companies take to continue to show growth on paper. While it’s no surprise that banks are having trouble making money as the global economy slows, it is hard to see where they’ll turn after all the costs have been cut and capital managed.