HSBC Q1 Financial Results Disappoints; Stock Falls

HSBC Q1 Financial Results Disappoints; Stock Falls
By HSBC Holdings plc ( [Public domain], via Wikimedia Commons

HSBC Holdings plc (ADR) (NYSE:HSBC) reported disappointing financial results for the first quarter, which drove its shares lower on Wednesday. The stock price of the bank had declined more than 1% to $50.68 per share as of 2:03 P.M. in New York.

HSBC financial results

HSBC Holdings plc (ADR) (NYSE:HSBC) delivered a net profit of $5.1 billion or $0.27 earnings per share, down by 18% from $0.33 earnings per share in the year-ago quarter

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According to the bank, its profit before tax (PBT) declined 20% to $6.75 billion from $8.43 billion in the same period a year ago. Its PBT for the quarter just missed the $6.77 billion PBT estimated by analysts polled by Bloomberg.

The firm’s revenues for the three months period dropped 8% from $17.14 billion to $15.71 billion due to the negative impact from Retail Banking and Wealth Management as well as Global Banking and Markets.

According to HSBC Holdings plc (ADR) (NYSE:HSBC), its underlying operating expenses for the quarter declined 2% to $8.9 billion from $9.01 billion in the same period a year ago. Excluding special items, its operating expenses rose 2% because of investment in Global Standards, Risk and Compliance. The bank said cost-saving initiatives partially offset inflation.

HSBC Holdings plc (ADR) (NYSE:HSBC) ended the first quarter with 10.7% CRD IV transitional basis CET1 capital ratio was, down from 10.7% during the previous quarter. Its end point CET1 capital ratio declined from 10.9% to 10.8%. The decline was largely due to increased RWAs as a result of regulatory change.

The bank said the return on average ordinary shareholders’ equity fell 3.2% to 11.7% on an annualized basis. Its quarterly dividend is the same at $0.10 per share.

Business performance

HSBC Holdings plc (ADR) (NYSE:HSBC) reported that its Retail Banking and Wealth Management segment generated $1.7 billion in pre-tax profit, an increase of 4% from the same quarter a year ago due to reduced expenses and lower loan impairment charges.

The pre-tax profit of its Commercial Banking Segment increased 15% to $2.4 billion compared with its performance in the year-ago quarter. Its Global Private Banking unit reported $201 million pre-tax profit, up from $124 million a year ago while its Global Banking and Markets segment generated $2.9 billion pre-tax profit, down by 19% year-over-year. Its other business segments incurred a $566 million pre-tax loss during the quarter.

Analyst’s comments

Ian Gordon, an analyst at Investec, commented that the performance of the Global Banking and Markets segment of HSBC Holdings plc (ADR) (NYSE:HSBC) is “not surprising in the context of context of soft transaction volumes in the wider market.” He noted that the specific factors that contributed to the decline include lower balance sheet management revenues, lower rates, and non-recurrence of a $0.5 billion debit valuation adjustment in Q1 2013. Its capital financing also declined 5%.

Gordon also noted that HSBC Holdings plc (ADR) (NYSE:HSBC) reported that its contribution from Asia declined by 32% reflecting non-recurrence of $1.8 billion one-off contributions from Pin An and Industrial Bank in the first quarter last year. “The underlying contribution is also soft, a function of business divestment, as well as adverse FX moves,” according to the analyst.

Gordon maintained his Hold rating on HSBC Holdings plc (ADR) (NYSE:HSBC) with a 640p RoE-g/CoE-g target price.

“We see no easy way out and expect RoE to remain sub-10% until 2017e. Despite reasonable dividend support, trading on 1.3x 2014e tNAV and 12.9x 2014e EPS, we do not yet see the valuation as compelling,” Gordon continued. He prefers Standard Chartered PLC (LON:STAN) (LON:STAC), citing that it is trading at a discount, but with superior returns. He recommended Standard Chartered with a Buy rating.

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