We are maintaining a long-term Neutral recommendation on
HSBC Holdings plc
), based on the successful implementation of its restructuring
initiatives. However, for the first half of 2012, the company's net
income was down nearly 7% year over year.
Additionally, factors that continue to rankle include the impact
of the deepening Euro-zone crisis, various investigations related
to its business operations and regulatory restrictions on its
HSBC's results were adversely affected by higher operating
expenses, partly offset by slight improvement in revenue and growth
in total operating income. The financials were also negatively
impacted by the poor performance of Global Private Banking division
and loss in the Other segment. Nevertheless, decent performances by
the other three divisions were the upsides.
In 2011, HSBC announced its plans of restructuring the business
with the primary intention of increasing focus on the fast-growing
and profitable markets. As of July 30, the company announced the
divestiture or closure of 36 of its businesses, thereby recording
$2.7 billion of annualized cost savings.
Some of the major divestitures completed include the sale of
U.S. credit card business to
Capital One Financial Corporation
) and 195 branches to First Niagara Bank, N.A., a wing of
First Niagara Financial Group Inc.
Further, despite the uncertain macro environment, HSBC remains
strong with respect to its balance sheet and capital position. At
the end of the first six months of 2012, core tier 1 ratio improved
to 11.3% from 10.8% in the prior-year period.
We believe this capital strength will allow HSBC to enhance its
profitable market share. Also, as a consequence of capital
strength, unlike many of its peers, the company continued to pay
dividends over the last three years, though at a reduced rate.
CAPITAL ONE FIN (COF): Free Stock Analysis
FIRST NIAGARA (FNFG): Free Stock Analysis
HSBC HOLDINGS (HBC): Free Stock Analysis Report
To read this article on Zacks.com click here.
Additionally, HSBC's brand name, capital strength and extensive
global network enable it to attract and retain clients. In an
effort to further enhance its competitive advantage, the company is
trying to bolster its emerging-market exposure. The company has
also been taking advantage of higher-growth, lower-cost regions
such as China and India, to set up major back-office operations,
which are likely to boost the bottom line.
On the flip side, though HSBC has been reporting stable operating
income over the last several quarters, growth in core business
performance indicators, including net interest income and fee
income has been unsatisfactory. Additionally, the company would
find it difficult to sustain in a sluggish economy coupled with low
interest rate environment and increased regulations.
We believe that rising wage inflation in faster-growing markets and
strategic investments will not allow HSBC to make the cost line
favorable any time soon. In the first six months of 2012, the
underlying cost efficiency ratio deteriorated to 61.0% from 57.7%
in the prior-year period and was also substantially higher than the
company's target range of 48-52%. However, the re-engineering
efforts undertaken by the company to lower costs will take some
HSBC currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.