HSBC's new shape emerges after 2012's year of horrors
Banking group is increasingly looking towards the rapidly growing economies of Asia to drive profit as developed markets fail to impress
If you were to judge only by the headlines, then 2012 was truly an annus horribilis for HSBC.
In the United States, the bank had to pay a hefty US$1.9 billion to the authorities to settle federal anti-money-laundering investigations into transactions with its Mexican subsidiary.
And in Britain, it had to stump up US$4.3 billion in fines and compensation costs for customers who had been mis-sold payment protection insurance on their loans.
What's more, the bank got entangled in the scandal over rigging the London interbank offered rate, exposing it to unknown future legal liabilities.
Then to top it all, yesterday HSBC announced net profits slumped 16.5 per cent from US$16.8 billion in 2011 to US$14 billion last year.
Dig behind the headlines, however, and it soon becomes clear that although HSBC still carries a lot of unwelcome baggage from before the financial crisis, chief executive Stuart Gulliver's plan to remodel HSBC into a leaner, more efficient bank focused on the world's most rapidly growing economies is well under way.
Although the regulatory fines hurt, HSBC's decline in net profit last year was an accounting anomaly. The bank was forced to record a US$9.1 billion earnings swing against its loss as its own outstanding debt gained in value, pushing up the theoretical costs of launching a debt buy-back.
Stripping out this fair-value adjustment and gains from disposals, but including the penalties and provisions, HSBC's underlying pre-tax profits actually rose a creditable 18 per cent. The gains were driven largely by smaller losses in America as the bank continued to run down its US loan portfolio and by rapid growth in its Asian markets.
Meanwhile, Gulliver continues to sell off businesses and investments that don't fit into his master plan. Last year, he sold or closed 26 businesses, with a further four disposed of already this year, including the bank's stake in mainland insurer Ping An, bringing the total number of disposals since he took over in 2011 to 47.
Altogether last year HSBC shed 27,700 staff, although the bank's cost base actually climbed on the back of heavier compliance expenses in the US and rising staff costs in Asia.
As a result, the shape Gulliver has in mind for HSBC's future is becoming more clearly visible, with the bank shifting the focus of its business away from the developed markets of Europe and North America, and more towards the rapidly growing economies of Asia.
As the first chart below shows, last year the bank derived more than four-fifths of its underlying pre-tax profit from Asia - with Hong Kong by far the biggest single market - while the developed markets generated a combined loss.
This pivot has rewarded shareholders handsomely. Although HSBC's stock price dipped yesterday in London following the results announcement, the shares are up 22 per cent over the past 12 months, outperforming most of the bank's major European and US-based rivals.
So far, Gulliver's big bet on Asia looks like paying off. As long as China successfully avoids falling into the middle-income trap and the region's structural growth continues apace, HSBC should be well placed to reap the rewards.
Eagle-eyed readers may have noticed an unwonted discrepancy between the text of yesterday's Monitor, which described accelerating credit growth in China's shadow financial system and the column's second chart, which appeared to show non-bank credit growth slowing down.
Alas, the last seven months or so of data, showing a sharp increase in the rate of shadow market credit growth from 20 per cent year on year to 40 per cent, was inadvertently excised.
Here is the chart as it should have appeared. I apologise to our readers unreservedly for the mistake.