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HSBC - Revenues miss expectations

Nicholas Hyett | 19 February 2019 | A A A
HSBC - Revenues miss expectations

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HSBC Holdings plc Ordinary USD0.50

Sell: 433.95 | Buy: 434.15 | Change 1.20 (0.28%)
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Operating income rose 4% to $53.9bn in 2018 - coming in behind market expectations, as tough market conditions impacted the Wealth Management and Investment Banking units in the fourth quarter.

Revenue growth was partially offset by a 6% increase in operating expenses, with the result that underlying profit before tax rose 3%, year-on-year to $21.7bn.

The dividend remained unchanged at $0.51 per share.

The shares fell 3.4% in early trading.

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Our view

HSBC's always had an Asian flavour, it's named after two Chinese mega cities after all. After years retreating from smaller international operations, the bank is now betting big on the high-growth emerging economies of the Far East.

Asia accounted for 89.5% of profit before tax in 2018, and Asian revenues grew by 11% year-on-year. Capturing that growth isn't cheap though, and operating expenses have been creeping up as a result. Increased investment in digital capabilities is also demanding significant quantities of cash, although should bring long term cost savings.

Fortunately, HSBC is seeing income growth as well.

Both total loans and interest margins have improved, and this revenue should prove sustainable in the long term. Low levels of loan impairment bodes well for the quality of new loans, while the bank's trading and investment banking divisions are delivering strong performances too, albeit more modest.

The Chinese market has hit a few bumps in recent times, but HSBC expects the world's second largest economy to "maintain strong growth". That's crucial. Hong Kong was a major contributor to the 24% increase in credit cards issued in 2018, and the bank's invested heavily in HSBC Qianhai Securities, the first foreign owned business of its kind in mainland China.

However, emerging economies are volatile and HSBC's dominant position in trade finance, means it's particularly vulnerable to the trade dispute that's brewing between China and the US. If China sneezes, HSBC will come down with a bad case of the flu.

Our other concern is that HSBC's sheer size and complexity makes it difficult for management and investors to really grip what's going on across the business. 235,000 employees creates lots of opportunities for small parts of the business to operate in ways that damage the wider group.

Nonetheless, we think the bank's long term outlook is positive. As rapidly developing economies with growing populations, there are fundamental attractions to Asian markets, and while investment may hold back profitability in the short term, it's necessary to support growth.

The shares currently offer a prospective yield of 6.1%.

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Full Year Results

Total net interest income rose 8.2% in 2018 to $30.5bn, as net interest margins improved year-on-year and loans to customers rose 1.9% to $982bn. Bad loans were up slightly on last year, reflecting increased uncertainty in the UK.

Net fee income fell 1.5% to $12.6bn as expenses outstripped a modest increase in revenues. That reflects increased activity in the Hong Kong cards business, which is associated with higher expenses.

Conduct expenses in the period rose 28.7% to $727m, reflecting various ongoing regulatory issues and $172m in PPI compensation. Adjusted jaws for the year, the difference between income growth and cost growth, was negative at -1.2%.

Return on tangible equity improved to 8.6%, versus 6.8% in 2017.

The banks CET1 ratio fell from 14.5% last year to 14% in 2018. That's mainly due to currency movements, higher lending to customers and the $2bn share buyback completed during the year.

January has started well, with bad loans remaining healthy despite some softening in the UK. HSBC is targeting positive jaws in 2019, and a return on tangible equity of over 11% by 2020.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.