HSBC costs drop faster than revenue as domicile call postponed
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 lenders 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."
'Challenging Conditions'
HSBC shares fell 1.2 percent to 501.6 pence at 9:03 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, profit more than doubled to $2 billion, while revenue fell 4.8 percent to $4.3 billion amid "challenging market conditions." Global private banking reported a drop of 96 percent to $8 million.
"The revenue weakness was mainly due to weaker markets," Raul Sinha, an analyst at JPMorgan Chase & Co. with a neutral rating on the stock. "Overall, this was an in-line quarter, with little to get excited about" as the bank continues to build capital "and tries to bring down costs despite regulatory and inflation pressures."
'Positive Jaws'
The bank "will not accomplish positive jaws this year, due to lower revenue," Finance Director Iain Mackay told analysts on a call on Monday. Jaws, which is 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.
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 requested "further information," with a further update planned for early 2016 instead of at the end of this year, according to the statement.
Asia Profit
Pretax profit in Asia rose 2 percent to $3.5 billion in the quarter from a year earlier and impairments on bad loans fell 16 percent to $638 million. HSBC has said half of $180 billion to $230 billion of risk-weighted assets it plans to redeploy under a revised strategy will be invested in Asia, as it adds some 4,000 jobs in China's Pearl River Delta region over the next three to four years.
"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. The bank had warned performance in Asia could worsen amid a slowdown in Chinese growth and the Shanghai Composite Index's biggest monthly loss in six years in July.
Since taking over in 2011, Gulliver's 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 cut, the CEO said in June.
'Silver Lining'
Gulliver 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 those assets by $290 billion by the end of 2017, Gulliver said in the statement. The HSBC 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 key silver lining was continued run-off of risk-weighted assets, which fell $32 billion in the quarter, rising total disposals to $82 billion year-to-date," JPMorgan's Sinha said.
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. The bank's provisions for souring loans fell 16 percent to $638 million, while return on equity, a measure of profitability, was 10.9 percent for 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."
Source: Bloomberg
