HSBC Holdings Plc’s (HBC) earnings per share for the first half of 2012 were 45 cents, below the prior-year period’s earnings of 50 cents. The company’s net profit came in at $9.1 billion, down 6.7% from $9.8 billion in the comparable period last year.
Results for the period included $2.2 billion of adverse credit spread movements on the fair value of HSBC’s recognized debt and $4.3 billion of gains from disposals of non-core assets and operations.
Further, results were adversely impacted by the poor performance of Global Private Banking division and loss in the Other segment. However, strong performances by the Commercial Banking, Global Banking and Markets along with Retail Banking and Wealth Management segments were the positives for the quarter.
The core results were negatively impacted by higher operating expenses. Nevertheless, improved top line and growth in total operating income were the positive.
HSBC made significant progress in executing the strategy to reshape itself and improve its returns. Since the beginning of 2012, the company announced the divestiture or closure of 19 of its non-core/unprofitable operations across the globe.
Performance in Detail
Underlying profit before tax in the first six months of 2012 was $10.6 billion, declining 3.6% from the previous period. Higher operating expenses and certain law enforcement and regulatory matters adversely impacted the results. However, these were partially offset by higher revenue.
Total revenue (on an underlying basis) stood at $34.8 billion, climbing 4% from $33.4 billion in the first half of 2011. The improvement was driven by growth in revenues from Global Banking and Markets and Commercial Banking operations. Nevertheless, Retail Banking and Wealth Management business recorded lower revenues.
Total operating income surged 3.2% from the year-ago period to $43.7 billion. The increase was primarily due to improved net gains from financial investments, dividend income and other operating income. However, these positives were partly offset by reduced net interest income, net trading income and fee income.
Total operating expenses were $21.2 billion compared with $20.5 billion in the year-ago period. The rise was mainly attributable to higher employee compensation and benefits costs as well as general and administrative expenses. Further, since May 2011, the company has recorded $1.7 billion of sustainable cost savings, including $0.8 billion in the first half of 2012.
The underlying cost efficiency ratio deteriorated to 61.0% from 57.7% in the first half of 2011, as a result of higher expenses. The ratio was significantly below the target benchmark range of 48–52%.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $6.4 billion in pre-tax profit, significantly up from $3.1 billion in the prior-year period. The impressive rise was primarily due to lower loan impairment charges and strong revenue growth in the faster growing regions.
Commercial Banking: The segment continued to show improvements. Pre-tax profit of $4.4 billion was up 5.7% from the year-ago period. Segment revenue continued to bolster, buoyed by higher net interest income, partially offset by increase in loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment was $5.0 billion, up 4.9% from the first half of 2011. Despite uncertainty in the financial markets and the economic environment, results improved on the back of higher revenues, which were partly offset by rise in loan impairment charges and operating expenses.
Global Private Banking: Pre-tax profit for the segment was $527 million, down 4.5% from the corresponding period last year. Lower revenues and increased operating expenses were the major reasons behind the fall, partially offset by a decline in loan impairment charges and other credit risk provisions.
Other: The segment recorded a pre-tax loss of $3.7 billion in the first six months of 2012. The main reason behind this was increased adverse fair value movements arising from the effect of changes in credit spread on the fair value of the company’s long-term debt.
Profitability and Capital Ratios
Profitability ratios showed deterioration during the first six months of 2012. Annualized return on equity fell to 10.5% from 12.3% in the prior-year period. Moreover, pre-tax return on risk-weighted assets (annualized) improved to 2.1% from 2.0% in the first half of 2011.
HSBC continued to generate capital from its retained profits. The company’s core tier 1 ratio as of June 30, 2012 improved to 11.3% compared with 10.8% as of June 30, 2011. Total capital ratio also grew from 12.2% recorded at the end of the prior-year period to 12.7% as of June 30, 2012.
Our Viewpoint
Currently, the harsh impact of the deepening Euro-zone crisis is our primary concern. Moreover, HSBC is suffering from a weak revenue growth in its mature markets, attributable to the ongoing low interest rates and regulatory restrictions. However, the company is poised to benefit from its extensive global network, strong capital position, business re-engineering efforts and strong asset growth.
Further, HSBC’s cost containment measures will help it greatly to deal with the economic pressures. But, we expect high inflation in some key Asian markets, sluggish loan growth, insufficient core operating performance and high wage inflation to restrict the company’s growth, at least in the near term.
HSBC currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. One of the company’s closest peers – Barclays Plc. (BCS) retains a Zacks #4 Rank (short-term Sell rating).
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