HSBC wobbles despite earnings beat

HSBC made much more than the City expected in the first quarter of 2015. A typically strong start to the year for the global banking & markets (GB&M) division had group profits about 22% above consensus estimates. HSBC shares jumped quickly on the news, published at 9.15am, but gains have disappeared ahead of a late morning conference call with analysts.

Reported pre-tax profit rose by 4% in the three months to March to $7.1 billion, way ahead of consensus at $5.8 billion. It's a country mile ahead of the $1.7 billion made in the fourth quarter of last year, too. A 4% increase in adjusted revenue, which strips out one-offs and currency moves, to $15.4 billion, plus a lower loan impairment charge - $570 million versus forecasts for about £1 billion - also had adjusted pre-tax profit up 5% at $6.9 billion.

GB&M adjusted revenue grew by 8% to $5.2 billion and profits jumped by 6% to $3 billion after a big improvement in foreign exchange, equities and balance sheet management. However, a 3% drop in revenue from commercial banking at $3.9 billion was down on last year and weaker-than-expected.

There was a small increase in the Common Equity Tier 1 (CET1) ratio to 11.2% from 11.1% at year-end. Investec Securities thinks this will build towards 12-13% over the next couple of years. "Capital is not our primary concern per se, albeit the scale of ongoing capital build has already forced management to rebase and defer attainment of its RoE target, and reinforces our expectation that RoE will remain below 10% through 2015-17e," says the broker.

Of course, operating costs were high, up by 6%, or $483 million, to $8.5 billion as wages rose and as HSBC spent more on regulatory programmes and compliance. This has been a real issue for the lender, and is one of the key reasons it is, once again, considering upping sticks and shifting HQ to its spiritual home in Hong Kong.

Over 20 years since moving here following the purchase of Midland Bank, it seems a final decision on its domicile is near. Indeed, chief executive Stuart Gulliver has just said a decision will "take us a few months, not years." We'll hear more at an investor update on 9 June.

HSBC regularly reviews its domicile, but Gulliver has been more vocal in recent years, and the Chancellor's decision in the last Budget to increase the bank levy from 0.156% to 0.21%, appears to have been the straw that broke the camel's back.

UK banks with larger balance sheets are most affected by the charge, and HSBC has the largest. George Osborne has more than doubled the levy since its introduction in 2010, and the latest increase part-funds many of the fiscal giveaways in his final Budget before the general election.

HSBC shares are up 14% since mid-March, with the re-domicile story grabbing headlines, and there's a prospective dividend yield of about 5.5%. However, on 1.3 times estimates for 2015 tangible net asset value (tNAV), they are expensive compared with UK peers. The 200-day moving average (see blue line on chart above) is the next support level.

"Commercial Banking performance and CET 1 accretion were in our view insufficient to sustain recent share price strength," reckons Numis Securities, which keeps its 'add' rating and 700p price target.

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