HSBC Cuts Profitability Target as Earnings Miss Estimates

Monday, 28 Feb 2011 08:23 AM

 

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HSBC cut its profitability targets due to the cost of tougher banking regulations and plans to cut costs and overhaul other areas after its annual profits fell short of expectations.

Europe's biggest bank said 2010 pretax profit more than doubled from 2009 to $19 billion, but that fell short of the average forecast of $20 billion, according to analysts polled by Reuters Estimates.

New chief executive Stuart Gulliver cut the bank's long-term return on equity (RoE) target to 12-15 percent from a previous 15-19 percent target as the cost of hoarding more capital to make banks safer takes its toll. It also reflected a view that economic recovery will be "somewhat unstable and uneven".

HSBC shares were down 5 percent at 675.5 pence by 1220 GMT, falling to their lowest level in nearly a month and helping drag the European bank index down 1 percent.

"They've revised down their return on equity range so people are saying why should it trade at a premium to book value," said Colin Morton, fund manager at Rensburg Fund Management. "All in all it's not a very good performance."

Gulliver, who took over at the start of the year, gave a blunt assessment of the results, where a near halving in bad debts masked an 8 percent rise in costs and an 8 percent fall in underlying revenues.

"The market has seen revenues flat, costs up and most of the gain through loan impairment charges coming down. That's why we need to look at how we run this bank going forward ... we need to fine-tune some aspects," Gulliver said.

"It's not a bad result, but it's not at all where I want to be, in terms of RoE or the cost efficiency ratios," he told reporters on a conference call.

TOUGHER CAPITAL RULES

HSBC said it had made a good start to the year and Gulliver said he would unveil more details of his strategic plan in May. He also plans to introduce quarterly reporting later this year.

He aims to get costs back below 52 percent of revenues after an "unacceptable" spike to 55.2 percent, but said that will take two to three years. Costs surged in Europe, while there remains pressure to pay investment bankers well in fast growing Asian and Latin American markets.

HSBC's investment bank arm, global banking and markets (GBM), made a $9.5 billion profit, down 9 percent on 2009 but its second best year and contributing half the group total.

Its North America business also eked out a slim profit for the first time since 2006, as losses fall from the run off of its troubled former consumer finance unit Household.

Banks around the world are under pressure from regulators to build capital to give them a bigger cushion to protect depositors in the event of another financial crisis.

Gulliver, who said he is keen to list in Shanghai as soon as authorities there allow, said HSBC does not need a rights issue to raise new capital.

But the bank estimated full implementation of new Basel III capital rules, which will be phased in before 2019, would probably see big banks need an equity Tier 1 capital ratio of 9.5 to 10.5 percent. HSBC's core Tier 1 ratio was 10.5 percent at the end of December, but if Basel III was fully applied now that level would likely be cut by 250-300 basis points, it said.

European rivals Barclays and Credit Suisse have also scaled back their profitability expectations as the regulatory landscape shifts.

Gulliver, a 30-year HSBC veteran, took over as CEO from Michael Geoghegan at the start of the year. New Chairman Douglas Flint and Finance Director Iain MacKay completed a top team overhaul after a boardroom power struggle erupted in September.

HSBC's annual report, also released on Monday, showed Gulliver was paid 6.2 million pounds last year, when he ran investment banking. That included a 5.2 million pound bonus and compared with 9.8 million pounds in 2009.

An unnamed employee was paid 8.4 million pounds last year, according to disclosure made by the bank under Hong Kong listing rules. That is likely to have been a trader in GBM.

Its key 280 staff in risk roles each earned an average of almost $1.7 million last year, with a majority of that pay in bonus, according to more transparent pay disclosures.

Overall compensation for staff was just under $20 billion, up 7 percent on 2009, after a recruitment drive in Asia, where bonus payments also increased.

A British tax on bank assets to be introduced this year would cost HSBC about $600 million based on its balance sheet at the end of December. That marks a cost for being based in Britain, HSBC said, estimating that two-thirds of the tax applied to its non-UK balance sheet.

HSBC said it would pay a final dividend of 12 cents a share, making a full-year payout of 36 cents, and said it aims to pay 40-60 percent of attributable profits in dividends.

© 2014 Thomson/Reuters. All rights reserved.

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