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HSBC - dividend back, but 2022 targets dropped

Nicholas Hyett, Equity Analyst | 23 February 2021 | A A A
HSBC - dividend back, but 2022 targets dropped

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HSBC Holdings plc Ordinary USD0.50

Sell: 424.35 | Buy: 424.50 | Change 4.40 (1.05%)
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HSBC reported full year revenues of $50.4bn, down 10% year-on-year, as a good result from the global investment bank failed to offset the impact of lower interest rates around the world.

Profits before tax fell 34.2% to $8.8bn as the bank reported a significant increase in provisions for poor performing loans.

The bank announced a dividend of $0.15 per share.

The low interest rate environment means the bank no longer expects to meet its 2022 profitability targets. Instead, management are now planning to achieve a return on equity of 10% or above "in the medium term".

HSBC shares fell 2.1% in early trading.

View the latest HSBC share price and how to deal

Our view

While full year revenues and profit numbers aren't pretty, they're actually better than the market had expected. Instead we suspect it's the bank's decision to abandon 2022's profitability targets, as well as an accompanying strategy update, which has disappointed investors today.

HSBC's sprawling global footprint means it's present in some markets where either its business is sub-scale or it sees long term returns as unattractive. Specifically, the bank's looking at selling its French retail operation and "reviewing other options" for its US retail business, with the capital freed up by the reshuffle set to be ploughed into stronger performing regions in Asia. The other arm of the strategy calls for yet more cost saving, with investment in technology and automation potentially boosting the profitability of any future revenue growth.

There's nothing wrong with that as a plan, but the move is taking longer than some had hoped. There was no real update on progress at the full year, and in the meantime profits are struggling.

To be fair 2020 has been a difficult year for bank's generally.

Provisions for bad loans have spiked, with provisions as a percentage of all loans more than tripling on 2019 levels. That move includes a big jump in the fourth quarter as the bank warned the outlook for the UK economy had deteriorated. Hopefully provisions will fall from here as the global economy emerges from the coronavirus crisis - although what the gradual withdrawal of government support around the world will mean for defaults remains to be seen.

More problematic is the fact lower interest rates look like they're here to stay. Lower interest rates mean lower net interest margins (NIM - the difference between what the bank can make on loans and pays for funding), making lending less profitable. A $1trn+ loan book means the pain from a lower NIM will mount as more mature fixed loans roll-off.

It doesn't help that reduced economic activity has also hurt the trade finance and commercial banking businesses - fee-based income that the bank will lean on heavily in a low interest rate world.

Fortunately, HSBC has a large investment banking arm, which is providing some short-term relief. This division makes a substantial chunk of revenue through trading and banking fees when companies raise money - so is less influenced by global interest rates. Turbulent financial markets have led to a spike in trading and hedging activity, which is been good news for revenue. In the near-term it will help the group mitigate headwinds impacting the rest of the business.

The bank is also heavily exposed to emerging Asian economies, particularly China, and there are some signs these markets are recovering reasonably well from the coronavirus shock. Certainly, the region performed better than others last year - although US/China tensions are potentially very disruptive if they continue.

While we remain conscious of the risks in more developed markets and the strategic-pivot is taking longer than we'd like, an Asian focus could prove an advantage over more domestically focused rivals. After a year of regulator-imposed restraint, dividends are back on the table. While it looks set to be lower than some might have liked, a capital position well above target should mean the dividend is ultimately sustainable.

Investors are now at least being paid to wait and see if HSBC's pivot delivers fruit. The low interest rate environment is a long-term headwind, but if HSBC can eek out income growth then a more efficient cost base could help deliver those long-delayed profitability targets.

HSBC key facts

  • Price/Book ratio: 0.71
  • 10 year average Price/Book ratio: 1.33
  • Prospective dividend yield (next 12 months): 4.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

HSBC's total loans to customers remained broadly unchanged year-on-year at a little over $1trn. However, lower interest rates meant the bank's net interest income fell 9% to $27.6bn as the average net interest margin fell from 1.58% a year ago to 1.32%. Low interest rates hit the Wealth & Personal Banking and Commercial Banking businesses particularly hard.

Net fee income fell 1.2% to $11.9bn - reflecting lower unsecured borrowing among retail clients and lower trade related activity among commercial customers. Trading income fell 6.3% to $9.6bn - again reflecting the effect of lower market interest rates.

HSBC's insurance business saw premiums fall $0.5bn to $10.1b, as insurance volumes fell in Hong Kong and France.

HSBC reported credit impairments during the year of $8.8bn, up from $2.8bn in 2019. The increase reflects increased uncertainty in the UK, and some individual commercial names.

Underlying operating expenses fell 3%, benefitting from cost saving initiatives, lower performance related pay and discretionary expenditure. That more than offset increased investment in technology, reaching $5.5bn in 2020.

The bank finished the year with a CET1 ratio of 15.9% up from 14.7% a year ago. that reflects the non-payment of dividends during the year and changes to the accounting treatment of software assets. The bank intends to operate in the 14-14.5% range going forwards, paying out 40-55% of profits as dividends.

The bank achieved a return on tangible equity during the year of 3.1%, down from 8.4% a year ago.

Find out more about HSBC shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.