HSBC Holdings plc’s HSBC net profit for third-quarter 2015 increased 51% year over year to $5.5 billion. Further, earnings came in at 25 cents per share, up from 17 cents earned in the prior-year period.
Lower fines and settlement charges, along with steady progress in HSBC’s cost-saving initiatives, acted as tailwinds. However, continued pressure on the top line and a rise in loan impairment charges were the undermining factors.
Performance in Detail (On Adjusted basis)
Profit before tax was $5.5 billion, down 14% year over year. The decline was largely due to lower revenues, a rise in loan impairment charges and higher operating expenses. However, on a reported basis, profit before tax jumped 32% to $6.1 billion, reflecting lower fines, settlements, customer redress as well as favorable movements in the bank’s credit spread.
Total revenue of $14.0 billion fell 4% year over year. The decrease mainly reflected lower revenues in Retail Banking and Wealth Management segment.
Likewise, loan impairment charges and other credit risk provisions surged 15% year over year to $638 million.
Total operating expenses rose 2% year over year to $8.6 billion. The increase was primarily triggered by inflationary pressures in Latin America and Asia, as well as a rise in regulatory programmes and compliance costs.
Cost efficiency ratio (reported) was 59.9%, down from 70.3% in the year-ago period.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $1.2 billion in pre-tax profit, down 11% year over year. The fall was mainly due to lower revenues, a rise in loan impairment charges, partially offset by a decline in operating expenses.
Commercial Banking: The segment reported pre-tax profit of $2.2 billion, a decline of 3% year over year. The fall was mainly caused by lower revenues, partly offset by a decrease in operating expenses and lower loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment was $2.1 billion, up significantly from $941 million in the prior-year quarter. The surge was driven by higher revenues, a decline in operating expenses and recoveries in loan impairment charges.
Global Private Banking: Pre-tax income for the segment was $81 million, down 57% from $190 million recorded a year ago. The decline was a result of fall in revenues as well as drastic deterioration in loan impairment charges, partially offset by lower operating expenses.
Other: The segment recorded a pre-tax income of $489 million against a pre-tax loss of $120 million in the year-ago period. The improvement reflected higher top line, partly offset by a rise in operating expenses.
Profitability and Capital Ratios
HSBC’s profitability and capital ratios remained strong. Annualized return on equity (“ROE”) was 10.9%, up from 7.2% as of Sep 30, 2014. Pre-tax return on risk-weighted assets (annualized) grew to 2.1% from 1.5% in the prior-year period.
The company’s common equity Tier 1 ratio (transitional) as of Sep 30, 2015 was 11.8%, up from 10.9% as of Dec 31, 2014. Further, leverage ratio was 5.0%, up from 4.8% as of Dec 31, 2014.
Our Take
By disposing unprofitable/non-core operations, HSBC has been striving to improve its profitability amid a challenging environment. We believe the company is poised to benefit from its extensive global network, strong capital position, cost-containment measures, business re-engineering initiatives and solid asset growth.
However, we believe that dismal European economy, weak loan demand, higher litigation costs and stringent regulations will continue to limit HSBC’s growth in the near term.
HSBC currently carries a Zacks Rank #4 (Sell).
Performance of Other Foreign Banks
Barclays PLC’s BCS third-quarter 2015 adjusted pre-tax earnings fell 10% year over year to £1.43 billion ($2.22 billion), owing to weak top-line performance. However, fall in operating expenses continued to act as a tailwind, driven by the bank’s cost-saving initiatives.
Including certain one-time expenses, Deutsche Bank AG DB reported net loss of €6 billion ($6.7 billion) in the third quarter of 2015 compared with €92 million ($122 million) in the prior-year quarter. Higher non-interest expenses and decline in revenues remained the concerns.
HDFC Bank Ltd.’s HDB second-quarter fiscal 2016 (ended Sep 30) net profit was INR28.70 billion ($0.44 billion), up 20.5% year over year. Results continued to reflect top-line growth, partially offset by elevated operating expenses as well as provisions.
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