Interactive Investor

HSBC punished for ugly results

21st February 2017 12:54

Lee Wild from interactive investor

As the best-performing bank share in the past eight months, HSBC's fourth-quarter and full-year results had to be good. They weren't. In fact, they were miles out, which explains a near-7% slump to a six-week low Tuesday.

A 1% dip in adjusted pre-tax profit of $19.3 billion (£15.6 billion) was "broadly satisfactory", said chairman Douglas Flint. That made it "a good year," according to chief executive Stuart Gulliver. However, a truck load of "significant items" meant reported profit plunged by 62% to $7.1 billion.

Blame the shortfall on a $3.2 billion goodwill charge on HSBC's 1999 purchase of Safra Republic Holdings, part of a restructuring of the European private banking operations. Changes in credit spreads on own debt cost $1.8 billion, there's an accounting loss on the sale of the Brazil business last year, and billions have been spent on achieving cost savings.

More importantly, HSBC made a reported loss of $3.4 billion in the fourth-quarter. Analysts were looking for a $2.7 billion profit. And a $1.3 billion miss on revenue at $11 billion was only partially offset by slightly lower costs and far lower-than-expected impairments of $468 million. That meant quarterly underlying pre-tax profit of $2.6 billion was 26% shy of consensus estimates.

Tangible net asset value (TNAV) drops from $7.37 in the third quarter to $6.92 this time, and the common equity tier 1 (CET1) ratio - a key measure of financial strength - fell 30 basis points quarter-on-quarter to 13.6%, worse than expected.

"The overall weakness [in revenue] reflects sharp net interest margin (NIM) compression, down by a further 6 basis points quarter-on-quarter to 1.60% in Q4 2016," writes Investec Securities banks analyst Ian Gordon, "exacerbated by lower interest rates and the mix effect of CML run-off in the US [selling consumer and mortgage lending assets] and growth in the UK mortgage book."

HSBC is at least using another $1 billion of the Brazil unit proceeds for share buybacks in the first half of 2017. Gordon, however, says it's "underwhelming", and HSBC must certainly crank it up during the second half if it's to meet City targets for around $3 billion for the year.

As expected, income investors will be happy with the $0.51 per share annual dividend made up by a final payout of 21 cents.

"We will continue to contemplate further share buy-backs as circumstances permit, and we remain confident of sustaining the annual dividend at the current level for the foreseeable future through the long-term earnings capacity of the business," said Gulliver.

At 664p, HSBC trades on around 1.2 times TNAV and 11.8 times earnings estimates for 2017

And what of the current year?

Well, Flint still believes his replacement will have been found by year-end, probably much sooner. Gulliver leaves in 2018.

While some of today's numbers look ugly, they have been heavily influenced by one-offs, and there are no serious concerns around regulatory capital. It now expects annualised cost savings of around $6 billion by the end of 2017, and is winning market share in key parts of the business. Signs of a cyclical upturn are encouraging, too.

Of course, there's also a long list of potentially disruptive events in the calendar for 2017 - European elections, a potentially protectionist Trump administration, Brexit negotiations, and the impact of a strong dollar on heavily-indebted emerging economies on which HSBC depends.

At 664p, HSBC trades on around 1.2 times TNAV and 11.8 times earnings estimates for 2017. It also offers a prospective dividend yield of 6.2%. That's not obviously cheap, and a bearish Investec thinks they're only worth 620p.

Given investor reaction today, hitting that figure in the short term would hardly rank as a surprise.

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.