HSBC Holdings Plc
) earnings per share reached 74 cents in 2012, trailing the
prior-year's earnings of 91 cents by 18.7%. In 2012, net profit
came in at $14.0 billion, plummeting 16.5% from $16.8 billion in
2011. The primary reason for the year-over-year fall in earnings
was a $9.1 billion negative swing in the fair value of own debt
as credit spreads tightened and a higher tax rate.
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Results for 2012 also included payments of $1.9 billion made as
part of the settlement of the investigations into past inadequate
compliance with anti-money laundering and sanctions laws as well
as extra provisions related to UK customer redress program of
Further, results were adversely impacted by the loss in the Other
segment. Yet, strong performances by all other divisions were a
positive 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 positives.
HSBC made significant progress in executing the strategy to
reshape itself and improve its returns. Since the beginning of
2011, the company announced the divestiture or closure of 47 of
its non-core/unprofitable operations across the globe. Moreover,
HSBC generated sustainable cost savings of $2.0 billion in 2012,
giving an annualized total savings of $3.6 billion. This
surpassed the company's cumulative target range of $2.5-$3.5
billion of savings since 2011.
Performance in Detail
Underlying profit before tax was $16.4 billion in 2012, surging
18.2% year over year. The increase was driven by revenue growth,
lower loan impairment charges and other credit risk provisions.
These positives were partially offset by rise in operating
Total revenue (on an underlying basis) stood at $63.5 billion,
climbing 7.0% from $59.3 billion in 2011. Improvement was largely
driven by growth in revenues from Global Banking and Markets,
Retail Banking and Wealth Management as well as Commercial
Banking operations, partially offset by lower revenues in Global
Total operating income inched down 1.1% from the year-ago period
to $82.5 billion. The dip was primarily attributable to reduced
net interest income and fee income. These were partially offset
by rise in net trading income, dividend income and other
operating income. This also included gains on sale of US branch
network, US cards business and Ping An Insurance (Group) Company
of China, Limited.
Total operating expenses were $42.9 billion, increasing 3.3% from
$41.5 billion in 2011. Expenses in the reported quarter included
aforesaid payments and provisions.
The underlying cost efficiency ratio deteriorated to 66.0% from
63.4% in 2011, as a result of higher costs. The rise in
efficiency ratio indicates lower profitability.
Performance by Business Line
Retail Banking and Wealth Management:
The segment reported $9.6 billion in pre-tax profit,
significantly up from $4.3 billion in 2011. The impressive rise
was primarily due to lower loan impairment charges and strong
The segment continued to show improvements. Pre-tax profit of
$8.5 billion was up 7.4% from $7.9 billion in 2011. Segment
revenue continued to bolster, partially offset by increase in
loan impairment charges.
Global Banking and Markets:
Pre-tax profit for the segment was $8.5 billion, increasing 20.9%
year over year. Segment results improved on the back of higher
revenues, which were partly offset by rise in loan impairment
Global Private Banking:
Pre-tax profit for the segment was $1.0 billion, up 6.9% from the
prior period. The marginal rise was driven by lower operating
expenses and declines in loan impairment charges and other credit
risk provisions, partly mitigated by fall in revenues.
The segment recorded a pre-tax loss of $7.0 billion in 2012
against pre-tax profit of $1.7 billion in 2011. The main reason
behind this was heightened 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 continued to deteriorate during 2012.
Annualized return on equity fell to 8.4% from 10.9% in 2011.
Moreover, pre-tax return on risk-weighted assets (annualized)
fell to 1.8% from 1.9% in 2011.
HSBC continued to generate capital from its retained profits. The
company's core tier 1 ratio as of Dec 31, 2012 improved to 12.3%
compared with 10.1% as of Dec 31, 2011. The rise was driven by
capital generation and a reduction in risk-weighted assets as a
result of business disposals. Total capital ratio also augmented
from 14.1% recorded at the end of 2011 to 16.1% as of Dec 31,
Concurrent with the earnings release, the HSBC board announced
fourth interim dividend of 18 cents per share. The dividend will
be paid on May 8 to holders of record as on Mar 21. This
represents a 28.5% rise in dividend compared with the final
dividend in 2011.
Currently, the harsh impact of the deepening Euro-zone crisis is
our primary concern. Moreover, HSBC is suffering from 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. However, 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 Rank #2 (Buy). However, other
foreign banks like
Banco Bilbao Vizcaya Argentaria, S.A.
Shinhan Financial Group Company Limited
Banco Macro S.A.
) carry a Zacks Rank #1 (Strong Buy) and are worth considering.