BLBG: HSBC Costs Drop Faster Than Revenue as Domicile Call Postponed
Third-quarter operating costs drop 19%, beating estimates
Bank won't accomplish `positive jaws' in 2015, Mackay says
HSBC Holdings Plc, Europe’s largest lender, offset a drop in third-quarter revenue with lower costs and litigation charges, while saying it needs more time to determine whether to move its headquarters from London.
Operating costs fell 19 percent to $9 billion from a year earlier, London-based HSBC said in a statement on Monday. That beat the $9.4 billion estimate of 14 analysts in a company-compiled survey. Revenue slipped 4.4 percent to $15.1 billion, while pretax profit rose to $6.1 billion from $4.6 billion a year earlier.
Chief Executive Officer Stuart Gulliver, 56, unveiled a three-year plan in June to pare back a sprawling global network, shut money-losing businesses and eliminate as many as 25,000 jobs after compliance costs surged. While other British lender including Barclays Plc set aside more money for past misconduct in the third quarter, HSBC benefited from a $1.4 billion decline in fines, settlements and redress for U.K. customers.
“HSBC’s reassuring dullness shines through,” said Ian Gordon, an analyst at Investec Plc with a buy rating on the stock. “Revenue weakness was concentrated in retail banking and wealth management and the investment bank, but strong cost and impairment performances delivered a resilient result which, in a challenging quarter for U.K. banks, offers modest encouragement.”
Positive Jaws
HSBC shares fell 0.8 percent to 503.80 pence at 11:09 a.m. in London. They have dropped about 17 percent this year after decreasing 8 percent in 2014.
At the retail banking and wealth management division, adjusted pretax profit fell to $1.5 billion from $2.1 billion a year earlier. In global banking and markets, which houses the investment bank, adjusted profit was little changed at $2 billion in that period.
HSBC “will not accomplish positive jaws this year, due to lower revenue,” Finance Director Iain Mackay told analysts on a call on Monday. Jaws, the difference between the rate of revenue and cost growth, slipped to a negative 4.1 percent in the year’s first nine months from a negative 2.9 percent in the first half. HSBC still targets a positive measure over the longer run, according to Mackay.
Domicile Decision
The bank, which has been generating most of its earnings in Asia, is assessing whether to move its headquarters away from London, partly because of increasing taxes and some of the strictest bank regulations in the world. Among the criteria listed as part of its assessment are also economic growth and long-term stability.
The board has requested “further information” and had questions about “fresh areas of interest,” Chairman Douglas Flint, 60, said on the analyst call. As a result, the bank may have to move the decision to 2016, instead of announcing it later this year, he said.
Adjusted pretax profit in Asia fell 4 percent to $3.5 billion in the quarter from a year earlier, while Europe reported a 44 percent slump to $969 million. Impairments on bad loans slipped 16 percent to $638 million, with the bank’s exposure to commodities remaining “very, very stable over the last couple of quarters,” Mackay said.
Asia Turmoil
“Despite slowing growth in the mainland Chinese economy and market volatility in Asia, there has been no visible impact on our Asian credit quality,” Gulliver said in the statement.
Still, the CEO said the market turmoil has slowed a planned redeployment of about $150 billion of risk-weighted assets in Asia, announced as part of a revised strategy in June. The bank’s total exposure to China is about $140 billion.
“What you wouldn’t expect us to do is to be mechanically redeploying RWAs against a more challenged economic backdrop,” Gulliver told analysts on the call on Monday, when asked about the additional investment in Asia. “Redeployment in this quarter has been quite modest, but the $150 billion target doesn’t change at all.”
Job Cuts
Since taking over in 2011, the CEO announced more than 87,000 job cuts, exited about 78 businesses and is close to finalizing the sales of its operations in Turkey and Brazil. In the U.K., as many as 8,000 jobs will be eliminated. By contrast, the bank will add some 4,000 jobs in China’s Pearl River Delta region over the next three to four years.
Gulliver said said while the sale of Brazilian unit “remains on track,” there’s “no update” on Turkey.
HSBC reduced its risk-weighted assets by another $32 billion and is almost 30 percent of the way towards its target of reducing unwanted assets by $290 billion by the end of 2017, Gulliver said. The bank reported a common equity Tier 1 capital ratio, a measure of financial strength, of 11.8 percent, up from 11.6 percent in the first half.
“The whole beat was on the cost cutting and lower amount of fines, and provisions for bad loans were good,” Patrick Armstrong, chief investment officer of Plurimi Investment Managers, which owns HSBC shares, said on Bloomberg Television. “The stock is down not so much on the earnings but on what’s happening in China. It’s a bit of a play on the global growth story; people have worries about that but that’s what’s making it cheap right now.”
British banks’ earnings have been battered by rising costs for misconduct. Barclays last week forecast that conduct and litigation charges would remain “elevated,” when cutting its profitability target for next year. Lloyds Banking Group Plc said that it may have to set aside an additional 1 billion pounds ($1.5 billion) in the second half to cover wrongly sold payment protection insurance.
By contrast, HSBC’s redress to U.K. customers fell to $67 million in the third quarter from $701 million a year earlier. Provisions for souring loans declined 16 percent to $638 million, while return on equity, a measure of profitability, was at 10.9 percent in the third quarter, up from 7.2 percent a year earlier.
“Our cost-reduction measures are beginning to have an impact,” Gulliver said. “There is more to achieve on costs and we expect the measures we have already taken to have a further impact in the fourth quarter.”
