HSBC Holdings Plc’s (HBC) third-quarter 2011 net profit came in at $5.2 billion, up 66% from $3.2 billion in the year-ago quarter. Results for the reported quarter included favorable credit spread movements of $4.1 billion on the fair value of the company’s recognized debt.
The year-over-year improvement was primarily led by continued strong performance by the Commercial Banking segment and a significant improvement in profit of the Other segment. Performance of all other businesses showed deterioration compared to the year-ago quarter.
Increased net interest income, stable net fee income and lower insurance claims were among the positives during the quarter. However, substantially lower net trading income, increased loan impairment charges and higher operating expenses were the headwinds.
Underlying profit before tax was $3.0 billion, down 36% from $4.6 billion in the prior-year quarter. The decline resulted from lower revenues in Global Banking and Markets, an adverse movement in non-qualifying hedges and higher loan impairment charges, primarily in North America, partially offset by increased Commercial Banking revenues.
The company’s efforts to expand its Commercial Banking business across both developed and faster-growing markets and repositioning Retail Banking and Wealth Management showed solid progress so far this year.
Quarter in Detail
Total operating income increased 15% year over year to $18.7 billion. The increase was primarily driven by improved net interest income (up 6%), net earned insurance premiums (up 26%) and substantially higher income from financial instruments designated at fair value, partially offset by reduced trading and dividend income.
Total operating expenses were $9.9 billion, up 5% from $9.4 billion in the prior-year quarter. The cost efficiency ratio for the reported quarter improved to 49.5% from 61.0% in the prior-year quarter. The ratio was well within the benchmark range of 48-52%. This improvement largely reflects the changes in the fair value of the company’s debt.
Profitability Measures
Profitability ratios showed improvement during the quarter. Annualized return on equity improved to 13.2% from 9.0% in the prior-year quarter. Moreover, pre-tax return on assets (annualized) increased to 2.4% from 1.3% in the year-ago quarter.
Capital Level
The company continued to generate capital from its retained profits during the quarter. However, the company witnessed a $4.5 billion decline in core tier 1 capital due to the strengthening of the US dollar. Consequently, the core tier 1 ratio at September 30, 2011 decreased to 10.6% from 10.8% at June 30, 2011. Total capital ratio also declined to 14.6% from 14.9% at the end of prior quarter.
By Business Line
Retail Banking and Wealth Management: This segment witnessed year-over-year deterioration in pre-tax profit primarily due to the increase in loan impairment charges associated with the company’s run-off consumer finance portfolio in North America and the impact of adverse fair value movements. These negatives were partially offset by net interest income growth in Latin America and Rest of Asia-Pacific.
Commercial Banking: This segment continued to show improvements. Pre-tax profit was better than the year-ago quarter. Despite the increasing headwinds in several economies, primarily in Europe, revenue continued to grow buoyed by higher net interest income from customer loan growth.
Global Banking and Markets: Pre-tax profit for this segment was lower than the year-ago quarter. Results were hurt by the challenging trading environment, widening credit spreads and continued uncertainty related to the European debt.
However, strong franchises in Foreign Exchange improved revenues significantly during the quarter, particularly in Asia and the America. Moreover, continued new business origination in Project and Export Finance contributed to the revenue grwoth.
Global Private Banking: Pre-tax profit for this segment came in lower than the prior-year period. Higher average client assets under management and a rise in transaction volumes were among the positives. However, these were more than offset by an increase in operating expenses denominated in Swiss francs, the hiring of staff to cover faster-growing markets and regulatory costs.
Other: This segment witnessed improved pre-tax profit over the prior-year quarter due primarily to gains arising from the effect of changes in credit spread on the fair value of the company’s long-term debt.
Dividend Update
On November 7, 2011, the HSBC board announced third interim dividend of 9 cents per share.
HSBC currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, the company’s closest competitor – Barclays Plc. (BCS) retains a Zacks #3 Rank (a short-term Hold rating).
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