HSBC slides after 62% profits plunge

HSBC threw in an extra £1bn share buyback and offered assurances about maintaining its dividend to try and keep investors onside as it reported a bigger than expected drop in annual profits and admitted it may need to move 1,000 jobs from London to Paris over the next two years due to Brexit.

Europe's largest lender and the largest FTSE 100 constituent delivered a reported profit before tax of $7.1bn that was down 62% on the prior year.

Fourth quarter adjusted pre-tax profits increased 39% to $2.62bn, but this was short of the consensus $3.78bn forecast as adjusted revenues slipped 3% to $11bn, again short of the market forecast of $12.4bn.

The reported annual profit was also less than half of analysts’ consensus forecast of $14.4bn, according to Reuters.

But as the reported figure included one-off items, most of which had no impact on capital, management maintained a positive opinion of last year, with adjusted profit before tax of $19.3bn only down 1.2%.

"2016 was a good year in which we delivered a solid performance from all our global businesses, made better-than-anticipated progress in reducing our cost base, and delivered a total return to shareholders of 36%," said chief executive Stuart Gulliver.

"We are investing over $2bn in digital transformation initiatives to improve our offer to customers, and are instigating a further $1bn buy-back programme reflecting the strength and flexibility of our balance sheet."

This buyback, which comes on top of the $2.5bn of repurchases made last year on the back of the Brazil sale, was largely expected by analysts.

Although operating costs grew 3% in the fourth quarter, adjusted operating expenses fell by 4% over the year and reported operating expenses were broadly unchanged as annualised run rate savings of $3.7bn were made.

The group said it will take an incremental $1.5-2.0bn of restructuring charges in order to make additional cost savings of around a net $0.6bn.

HSBC said its Tier-one capital ratio, a key measure of balance sheet strength for banks, dipped from 13.9% in the third quarter to 13.6% over the three months to September but was increased from 11.9% a year before.

To remedy the situation, HSBC announced further cost cuts, pledging annualised cost savings of roughly $6.0bn while continuing to invest in regulatory programmes and compliance, with around $6.0bn of costs-to-achieve investment required.

The bank also flagged multiple headwinds totalling around $3bn for 2017 and confirmed that current contingency plans suggested it would need to move 1,000 jobs from London to Paris over the next two years, depending on how Brexit negotiations unfold.

Mixed reaction

The group HSBC shares fell almost 6% to 670.10p by 0825 GMT on Tuesday, wiping out all their gains since the start of the year.

With a 7.5% weighting on the bluechip index, the bank's fall dragged down the entire index into the red and helped send peers Lloyds, Barclays and RBS lower ahead of their results later in the week.

"HSBC’s share price has travelled a long way in the last year, while the earnings of the company have actually taken a step back," said analyst Laith Khalaf at Hargreaves Lansdown.

"The bank is a shining example of how the decline in sterling has bumped up the price of some of the UK’s largest companies, without much progress in underlying profits."

As the biggest single stock in the Footsie, Khalaf said the effect of the currency on HSBC was "real and tangible" for millions of UK investors and pensioners.

"Weaker sterling has significantly lifted the value of their shareholding, and the dividends they receive in pounds and pence, and as we know it’s best not to look a gift horse in the mouth. Despite an underwhelming set of full year results, HSBC is making progress in de-risking and restructuring, and ultimately the bank’s focus on the far east could be its trump card if the Chinese economy starts to fire on all cylinders."

Goldman Sachs said the fourth quarter results were weaker than expected, chiefly driven by lower revenues explained by the non-recurrence of strong revenues in Asia from the third.

"Investor focus will be on HSBC’s revenue outlook, particularly given its exposure to a rising US$ rate cycle," analysts wrote, adding that they believe the key question "is to what extent the group will be able to offset these through volume growth".

On the upside, the final quarter showed "encouraging signs" for loan growth in both HK and the UK mortgage business.

Neil Wilson at ETX Capital said as one of the big dollar earners on the index HSBC enjoyed an incredible post-Brexit rally but this was coming undone as "weaker earnings and a steadier pound means the stock may have peaked for the moment", with rally in UK banking stocks since Brexit also maybe coming to an end.

"Despite the headline fall in profits, there was some good stuff in there," he noted, pointing to net interest margin's squeeze throughout 2016 now looking to ease thanks to exposure to tightening US interest rates, effective cost-saving initiatives and the CET1 capital ratio increased from a year before.

Wilson said the share price drop seems justified based on the weaker-than-expected revenues and profits, with the shares still around their best in more than 3 years.

"But all the dollar-earning upside may have been baked into the stock price already and with the pound now pretty steady, the free ride for HSBC’s shares looks over."