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HSBC - profits fall, with a warning on Panama Papers

HSBC has announced its reported profits fell by 29% to $9.7 billion in the first half of 2016.

However the headline figure is distorted by a technical accounting measure, which booked a notional loss of £1.2 billion on HSBC’s outstanding debt.

A far more accurate picture of HSBC’s performance is the adjusted profit figure, which still isn’t great, but shows a more moderate decline in profits by 14%, from £12.6 billion down to £10.8 billion. Trading may have been tough, but many analysts feared it could have been worse.

The bank continues to cut costs, with adjusted operating expenses falling by 4%. But revenues fell faster, by 4.5%, which together with a doubling of loan impairments led to the fall in profits.

In a weighty section of the bank’s report detailing its litigation risks, HSBC also warned there could potentially be a significant impact on the bank from ongoing investigations into the Panama Papers:

‘Mossack Fonseca & Co.

HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.

Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.’   HSBC Interim Results, 3rd August 2016

HSBC has now completed the sale of its Brazilian business, which has paved the way for the bank to announce a $2.5 billion share buyback, which will take place later this year.

The bank back-tracked on plans to achieve a 10% Return on Equity by the end of next year. This remains their long term goal, but projections of an extended period of low interest rates have kicked this target into the long grass.

HSBC said it is planning to maintain the dividend for the foreseeable future.

The share price rose over 3% in early morning trading.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

‘It’s proving to be an unhappy reporting season for banks, with HSBC being the latest to report a drop in profits, despite the bank’s best efforts to cut its cloth by stripping out costs.

The problem for HSBC is its revenues fell faster than it could cut costs, resulting in negative jaws in banking parlance, which combined with an increase in bad loans led to falling profits.

HSBC is one of the biggest stocks in the Footsie, so its performance will have a big impact on the UK stock market, and the returns enjoyed by UK investors in their pensions and ISAs. That performance is being increasingly dominated by Asia however, with the bank unashamedly pivoting back to its roots in Hong Kong and the surrounding region. Around three quarters of HSBC’s latest reported profits came from Asia.

Litigation remains a key risk for the banking sector, and HSBC’s report on the legal proceedings facing the bank reads like a barely trimmed down version of War and Peace. This includes a section on the Panama Papers which states HSBC does not know at present what, if anything, the impact on the bank will be, but warns it could be significant.

The bank is currently rewarding shareholders with dividends and a new share buyback scheme. The stock is now yielding around 7.5%, which suggests markets are treating dividend payments with a healthy dose of scepticism, though the $2.5 billion share buyback programme may relieve some of that doubt.

HSBC is facing challenging times as it restructures its business, but for the moment, at least investors are being paid to wait.’


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