Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • Register
  • Help
  • Contact us
  • Log in to HL Account

HSBC - Profits fall as one-off charges bite

Nicholas Hyett | 21 February 2017 | A A A
HSBC - Profits fall as one-off charges bite

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

HSBC Holdings plc Ordinary USD0.50

Sell: 406.65 | Buy: 406.85 | Change -6.25 (-1.51%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Reported profits fell 62.3% at the full year to $7.1bn. However, this reflects a number of one off charges, including a $3.2bn goodwill write-down in the European private bank and transformation costs of $3.1bn.

HSBC reported an adjusted full year profit before tax (allowing for exceptional items) of $19.3bn, down 1.2%. The shares fell 4.5% in early trading.

Our View

HSBC's investment case is all about shareholder returns. The bank offers a prospective dividend yield of 5.6%, and by mid-2017 will have returned $3.5bn to shareholders through share buybacks in less than a year. That might seem generous, but the real question for investors is can it be sustained and, longer term, can it be grown?

Recent history isn't favourable. As the bank has sought to restructure itself after the financial crisis revenues have trickled away. So far HSBC has been able to offset lower revenues with cost cutting, but that can't be maintained forever. Return on equity hit a low of just 0.8% in 2016, where not so long ago the group was targeting 10% by 2017, while the dividend is also a long way from being covered by earnings.

Look a little deeper though and things are not quite as bad as they seem. The group's shift towards Asia post financial crisis has resulted in a long list of one-off write-downs and transformation expenses, hitting headline revenues hard. Underlying revenues are still falling, but nowhere near as dramatically.

Longer term, HSBC's success will depend on the bank's ability to deliver on the fundamental attractions of its Asian markets; rapidly developing economies with growing populations. In particular HSBC wants to be the financier of choice for anyone doing business in China. Trade financing has always been big business for HSBC, reflecting its Hong Kong roots, and the bank is growing its market share. As time goes on HSBC and China's fortunes will be increasingly tied together.

Despite all the disposals and cost cutting HSBC remains something of a work in progress. The bank really needs revenues to turn a corner and although transformation costs look set to hang around for at least one more year, investors will be hoping that these 'one-offs' finally vanish from results soon.

With those immediate headwinds out of the way it will then be up to HSBC to prove that its move east can really pay dividends.

Full year results

Revenue across the bank fell 2.5% on an adjusted basis, with the decline largely offset by a 3.7% drop in operating expenses (although charges relating to bad loans are marginally higher).

The group has now delivered annualised cost savings of $3.7bn, and expects to achieve $6bn in annualised saving by the end of 2017. HSBC expects to incur restructuring costs of $6bn to deliver these savings.

Underlying profits at a divisional level saw profit uplifts in Commercial Banking and Global Banking & Markets. However, these were more than offset by declines in profitability in the Retail Banking & Wealth Management and Global Private Banking businesses (as well as the Corporate Centre).

HSBC has significantly improved its capital position over the year, with the bank's common equity tier one (CET1) ratio reaching 13.6% at yearend (2015: 11.9%). Risk weighted assets (RWAs) fell by more than $245m.

The full year dividend has increased slightly to $0.51 per share (2015: $0.50), while the bank has also announced a $1bn share buy-back programme. This follows a $2.5bn programme announced following the sale of the Brazilian business and is expected to complete in the first half of 2017.

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.