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HSBC - Underlying profits down 7%, dividends up 2%

Steve Clayton | 22 February 2016 | A A A
HSBC - Underlying profits down 7%, dividends up 2%

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HSBC Holdings plc Ordinary USD0.50

Sell: 401.80 | Buy: 401.90 | Change -1.15 (-0.29%)
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HSBC reported profits up 1% to $18.7bn, largely due to favourable one-off items. At the underlying level, profits actually declined by 7% to $20.4bn, on underlying revenues up 1% to $57.8bn. The bank declared an increased fourth quarterly dividend of 21 US cents, taking the full year to US 51c (2014 US 50c). Earnings per share were 65 US cents, down from 69 US cents in 2014. The results are slightly below the market consensus. HSBC shares fell 3% in early trading.

The group described the results as broadly satisfactory, given the slowing Chinese economy and weaker oil prices.

Revenues were strongest in the investment banking division, up 7%, with commercial banking revenues up 3% and retail & wealth management revenues 2% ahead. Bad debt charges jumped 17% to $3,721m, with increases across the globe. Underlying operating costs, excluding the bank levy were flat, leading to the bank generating a return on equity of 7.2%, slightly down on the year before (2014: 7.3%).

HSBC retains a strong capital base, with a Tier One capital ratio of 11.9% at year end, up 80bp over the year. The bank is shrinking exposures to lower returning assets and delivered a reduction of $124bn in risk weighted assets in the year, taking it almost halfway toward its 2017 target. The sale of their Brazilian business will see a further $33bn of asset reductions when the deal completes.

HSBC say they are a better balanced, better placed business than a year ago, with strong capital generation. They remain focused on delivering their China-focused strategy announced last year. Last week the bank announced that it would remain headquartered in the UK.

Our view:

It is very much work in progress at HSBC. The bank is engaged in a major repositioning, one which will see it become much more focused upon its Asian roots and far less exposed to volatile investment banking activities.

Trade financing has always been big business for HSBC, reflecting its Hong Kong roots. As China's global role rises, HSBC wants to be the financier of choice for anyone seeking to do business over there. In the meantime, HSBC's health remains dependent on the health of the broader global economy. The diversity of their loan book gives the bank resilience; apart from UK mortgages and commercial lending, no single asset class makes up more than 5% of their book.

Reshaping the group is no small task, and there is the minor issue of ring-fencing the UK retail bank to be undertaken too. But the group seem to making steady progress on the task of keeping costs under control whilst they do all this. In 2015, there was no underlying increase in costs between the first and second halves with the group aiming for up to $5.0bn of real terms reductions overall by the end of 2017.

HSBC and China's fortunes will be increasingly tied together. Current market concerns over the health of the Chinese economy are hardly going to be helpful for the stock. But investors have a dividend yield of almost 8% to fall back upon whilst China steadies itself. HSBC's payout is covered at least 1.4x in each of the next three years on current consensus forecasts, but those forecasts have been falling, meaning that the cover ratio is getting weaker. With a CET1 ratio of 11.9% the balance sheet looks strong too. Ultimately though, HSBC needs to convince the market that its restructuring will raise future returns in the business, from the group's current single digit expected future return on equity.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.