Cost Efficiency Measures Help HSBC Post $5.1 Billion Pretax Profit

Cost Efficiency Measures Help HSBC Post $5.1 Billion Pretax Profit
By HSBC Holdings plc ( [Public domain], via Wikimedia Commons

HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s pretax profit rose to $5.1 billion in the three months ending in September, thanks to cost efficiency measures initiated by the bank.

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Cost Efficiency Measures Help HSBC Post $5.1 Billion Pretax Profit

HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s third-quarter earnings rose 10% from the period a year earlier.

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Cost-cutting initiatives

During the third quarter, Britain’s largest bank was able to cut another $400 million in costs, bringing the total to $4.5 billion since the beginning of 2011.

HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s core Tier 1 capital ratio also improved to 13.3% at the end of September, compared to 12.7% at the end of June.

However, HSBC admitted that it was the subject of an investigation by several authorities into its conduct in the foreign exchange market. The bank indicated it was cooperating with investigations into the forex markets.

Last month, the bank was hit with a record $2.46 billion final judgment in a U.S. securities class action lawsuit, which is considered the largest in a securities fraud class action.

Investec maintains Buy rating on HSBC

Enthused by HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s recent strong results, Ian Gordon of Investec plc (LON:INVR) maintained a Buy rating with a target price of 745p.

The Investec analyst believes HSBC’s Q3 PBT of $4.5 billion was in-line with estimates, after adjusting for conduct costs and its own credit. The analyst notes Hong Kong was the stand-out performer with 2% QOQ in revenues. GB&M revenues were down only 13% QOQ. This compares favorably with developed world peers.

HSBC’s challenges remain

However, Gordon believes HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s challenges remain as the net loan growth remains weak thanks to residual drag from legacy run-off and strategic divestments. The ongoing margin erosion reinforces the analyst’s view that HSBC will marginally miss its 12% ROE target set for 2013e, besides extending to 2014/15e as well.

However, the Investec analyst is enthused by FX-assisted loan growth of 5% in the recent quarter.

Gordon points out that HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s costs appear a shade disappointing at $9.6 billion, though this includes $0.4 billion conduct costs. The statement also points to legacy, compliance and investment spending in mitigation.

Ian Gordon believes HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA)’s impairments were better, down $0.4 billion QOQ to $1.6 billion, largely reflecting non-recurrence of a Q2 spike in LATAM.

The Investec analyst reaffirmed his 745 pence target price for HSBC based on RoE-g/CoE-g.  However, the analyst continues to find better value in Barclays and Standard Chartered.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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