HSBC rocks despite profit plunge

HSBC made 86% less than last year during its third quarter. Its share price, however, is up almost 5%, making it the best performing large-cap Monday. That's because if you strip out one-off items, including a hit from the sale of its Brazilian operations, profit grew to an impressive $5.6 billion (£4.5 billion), smashing expectations.

A plunge in reported pre-tax profit from over £6 billion in 2015 to just $843 million this time is grabbing the headlines. But, remember, selling the business in Brazil generated an accounting loss of $1.7 billion after recycling foreign exchange losses.

Changes in the fair value of its own debt, plus the $1 billion spent on cost cutting, also affected the numbers. But, once all the adjustments are made, profit was actually up 7% from last year's $5.24 billion, despite a slight miss on revenue at $12.56 billion. Lower-than-expected costs of $7.2 billion certainly helped.

So, these are good numbers, although it is worth noting that impairments of $566 million had a big impact, coming in about 38% better than consensus of $913 million. But what investors are really raving about Monday is a sharp increase in the common equity tier 1 (CET1) ratio - a measure of a bank's financial strength - to 13.9%.

Analysts had pencilled in just 12.7%, still a decent increase from 12.1% at the end of the second quarter, and management only targeted 12-13%. But a change in how the regulator treats HSBC's 19% stake in China's Bank of Communications (BoCom) made a big difference.

Decreasing risk-weighted assets linked to BoCom by $121 billion was worth 104 basis points on CET1. That means that HSBC beat forecasts even without regulatory help.

"This is another action forming part of our ongoing capital management of the group that reinforces our ability to support the dividend, to invest in the business and, over the medium term, to contemplate share buy-backs, as appropriate," said chief executive Stuart Gulliver.

"It also provides us with a significant capacity to manage the continuing uncertain regulatory environment."

And that comment about the dividend is music to the ears of income investors. With around $13 billion of excess capital, dividend payments are underpinned for "the next couple of years," according to Deutsche Bank analyst David Lock.

HSBC has thrashed "big four" rivals in terms of share price performance in 2016If HSBC pays out as expected, the prospective yield is about 6.8%, he says.

Of the "big four" banks, HSBC has thrashed the opposition in terms of share price performance in 2016. Admittedly, rivals have clawed back some of the deficit in recent weeks, but the Far East-focused lender is still up 16% this year; the others are all deep in the red.

A slight miss on tangible net asset value (TNAV) at $7.37, or 593p, puts HSBC on a price/TNAV ratio of 1.05 times and price/earnings (PE) ratio of 11.4 times, based on City estimates for 2017.

Despite decent results, Lock still rates HSBC only a 'hold' with price target of 585p. UBS analyst Jason Napier also thinks that's the right price, rating the shares 'neutral'.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.