HSBC shares dive after messy final quarter causes profit miss

HSBC Holdings (LSE:HSBA) has again flexed its financial muscles with a leap in profits, despite an ugly final quarter which was marred by a large impairment relating to its Chinese operations.

Pre-tax profit rose by 78% to $30.3 billion, although the headline figure was shy of expectations, where a number of $34.1 billion had been pencilled in.

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The benefits of higher interest rates had a particularly positive effect on the HSBC balance sheet, and revenues of $66.1 billion represented an increase of 30% on the previous year, largely driven by a spike in Net Interest Income. Within the number, there were some particularly strong unit performances, such as Commercial Banking, which saw a revenue increase of 76%, and Global Banking and Markets, which improved 26% on the corresponding period.

Impairments for the year of $3.4 billion reflected some specific caution on the group’s Chinese commercial real estate exposure, and an accounting revaluation also resulted in a charge of $3 billion to HSBC’s investment in the Shanghai- based BoCom in the fourth quarter.

Offsetting these writedowns were a tailwind of $2.5 billion resulting from the disposal of the bank’s retail operations in France, and an accounting gain of $1.6 billion following the opportunistic acquisition of Silicon Valley Bank UK. In addition, the sale of the Canada business, which is expected to complete this quarter, will result in a fresh injection of capital, leading to the likelihood of a special dividend distribution of $0.21 per share to investors, which is being marked as a priority for the proceeds.

Indeed, the bank’s general strength and the accompanying increase in revenue and profits have once more enabled financial largesse to be maintained. An increase to the final dividend puts the projected yield on an extremely attractive 7.5%, with the group heralding the highest full-year dividend payout since 2008. In addition, a further share buyback programme of up to $2 billion was announced, which should provide some support for the share price.

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For the most part, the key metrics remain in fine fettle. Net Interest Margin rose from 1.42% the previous year to 1.66%, although the number was slightly shy of the previous quarter’s 1.7%. Return on Tangible Equity (ROTE) jumped from 10% to 14.6%, with a mid-teen target range remaining in place in the year to come.

The capital cushion, or CET1 ratio was stable and within the group’s preferred range at 14.8%, while a continuing focus on costs, as well as the increased revenues, dragged the cost/income ratio down to 48.5% from a previous 64.6%.

Despite the overall strength of the numbers, the share price reaction overnight highlighted some of the concerns which the group is likely to be facing in the coming months. The likely reduction of interest rates globally could remove a plank from a core growth area of late, while the rather messy performance in the fourth quarter could potentially lead to some rather more negative momentum.

Indeed, in the group’s own outlook, HSBC is forecasting slow growth for the first half of the year, followed by a gradual recovery, while inevitably the parlous state of the Chinese economy in general and the real estate sector in particular are ominous headwinds.

Even so, HSBC is managing to shield itself from economic attack through its sheer size, while also remaining mindful on the importance of continuing to grow the business, especially in areas where it has particular strength.

Among the bank’s immediate strategic objectives are to grow its international businesses while also diversifying its revenues, especially in the likes of its wealth businesses in Asia. Apart from the longer term potential for the key Chinese market, the group has also identified areas such as India and Vietnam as being some of the fastest growing economies at present. Building economic connections between Asia and the Middle East, notwithstanding any geopolitical conflicts, are also emerging opportunities for HSBC with its sprawling footprint.

HSBC’s sheer scale and power not only provide an economic shield, but also enable investment in further growth, shareholder returns and fresh areas of fee income such as within its various wealth management businesses.

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The London-listed shares have mirrored the Asian experience overnight and have opened sharply lower in early trade, recognising a disappointing final quarter which took much of the sheen from what was otherwise a strong set of results.

Prior to the open, the shares had risen by 4% over the last year, in sharp contrast to many of its peers and compared to a decline of 3.2% for the wider FTSE100 index. The share price setback could be temporary but even so there is an element of caution which extends to the market consensus, which currently stands at a 'hold', albeit a strong one.