HSBC Holdings Ordinary USD 0.50 (HSBA)

Company overview

HSBC Holdings plc (HSBC) is a global banking and financial services company. Through its subsidiaries and associates, HSBC provides a range of banking and related financial services. The products and services of the company include personal financial services, commercial banking, global banking and markets, and private banking. The group serves customers worldwide from around 7,500 offices in over 80 countries and territories in Europe, the Asia-Pacific region, North and Latin America, and the Middle East and North Africa.

HL Comment (9 November 2011)

The group's third quarter results (09Nov2011) appeared to fall foul of high expectations. Whilst parts of Asia, Latin America, notably Brazilian Commercial Banking and the group’s UK retail operations all performed well, reduced activity for its investment banking business and increased US debt provisions both impacted. As a result, underlying or adjusted pre-tax profit during the quarter period dropped by 36% to $2.96 billion (Q3 2010: $4.60 billion). Underlying revenue declined on the previous quarter, reflecting both Eurozone sovereign debt concerns and adverse movements in debt instruments, a result largely thanks to reduced long-term US interest rates. Accompanying management comments noted that "The sector faces significant headwinds. The continuing macroeconomic, regulatory and political uncertainty, particularly in Europe, adversely affected the industry's performance during the quarter". The group also appeared to suggest that it had not yet decided on whether to stay headquartered in the UK.

Negative Points:

• On an adjusted basis, pre-tax profit missed analyst forecasts.
• Loan impairment charges and other credit risk provisions were US$0.7bn higher as of 30 September 2011 than a year ago. The increase came mainly in the group’s run-off portfolio in North America, reflecting an increase in delinquency rates, deteriorating roll-rates and increased severity, and higher costs to obtain and realise collateral as a result of the delays in foreclosure activity.
• Underlying revenue declined for both the quarter and the nine month period compared to 2010. This was due to a number of factors, including Eurozone sovereign debt concerns.
• Group costs remained elevated compared to the prior year period, principally thanks to higher staff costs in the competitive Asian region – a cost efficiency ratio of 54.6% (cost as a proportion of income) was reported for the nine month period, up from 54.0% during the same period in 2010.
• As a result of the strengthening of the US dollar, core tier 1 capital cushion reduced by US$4.5 billion. Consequently, the core tier 1 ratio as of 30 September 2011 was 10.6% compared with 10.8% as at 30 June 2011.
• At the full year 2010 results, HSBC cut its return on equity target, a measure of profitability, citing tougher capital requirement regulations.
• The regulatory outlook still remains uncertain. At the full year results, management warned that increased financial regulation, particularly liquidity requirements may hamper lending as the industry is faced with mounting deposit obligations. The group is thought to be considering moving its headquarters from London.
• Uncertainty regarding the global economy has heightened. A debt crisis in the Eurozone has grown, political deadlock in the US has been seen, while tension in the Middle East earlier this year caused something of a spike in the oil price.
• Like rivals, provisions relating to the mis-selling of Payment Protection Insurance (PPI) in the UK have previously been announced.

Positive Points:

• The relatively new Chief Executive has commenced a refocusing of group costs and operations. The bank has announced 14 transactions this year, including 11 since 30 June 2011. Management noted that "we have begun to turn the corner on costs, with operating expenses falling compared with the previous quarter".
• Many parts of the group continue to enjoy growth, including its Brazilian commercial banking operations.
• The group enjoys a level of geographical diversity not seen by its UK headquartered rivals.
• Despite the marked rise in loan impairment charges during the third quarter, for the nine month period they declined, reflecting lower lending balances for its consumer finance portfolio in North America and improvements in delinquency trends and collections in the UK.
• Unlike rival banks Lloyds and RBS, HSBC survived the financial crisis without receiving direct government support.
• A progressive dividend policy continues to be pursued. For the nine month period 2011, a total dividend of 27 US cents had been announced, up from 24 US cents in the same period last year.
• The group's global nature could allow it to move to a more favourable home territory.

Consensus:

On balance, market consensus opinion currently indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.