Cleaner HSBC balance sheet leaves doubts

While investors are positive on bank's third-quarter profit that misses forecasts but lacks huge provisions, some analysts fear cloud remains

PUBLISHED : Tuesday, 05 November, 2013, 2:42am
UPDATED : Tuesday, 05 November, 2013, 12:15pm

HSBC, Europe's largest bank, failed to match analysts' third-quarter profit forecasts yesterday but a cleaner balance sheet, without massive provisions, still impressed the market.

Analysts said cost savings, shrinking bad debts and capital strength were better than expected after HSBC reported a third-quarter pre-tax profit of US$4.5 billion, up 30 per cent year on year but short of the market's US$5.4 billion consensus forecast. It fell 19.6 per cent from the previous quarter.

Excluding one-off gains on disposal of assets and fair-value changes in the bank's own debt, underlying pre-tax profit was US$5 billion.

Global banking and markets, the investment banking arm often regarded as the group's growth engine, performed better than its industry rivals, analysts said, although results were down on the previous quarter, with those from commercial banking.

They said prospects would be dependent on revenue growth and whether further provisions would be needed for fines and legal costs, after the bank disclosed that it was among those being investigated by Britain's Financial Conduct Authority in relation to trading on the foreign exchange market.

"Net loan growth remains weak, in part reflecting a residual drag from legacy run-off and strategic divestments," Investec analyst Ian Gordon wrote in a research report.

It reaffirmed a "buy" rating and a target price of 745 pence (HK$92), reflecting the bank's strong performance in Hong Kong and reduction in impairment provisions.

Some analysts said they were concerned that provisions had only been postponed, and potential massive liabilities still clouded the bank's prospects.

Maybank Kim Eng Securities analyst Steven Chan said legal cases in the United States still hung over HSBC, pointing to a fine of about US$2.46 billion last month in a class-action lawsuit against its former Household International unit for violating federal securities laws. The group is appealing against the verdict.

HSBC chief executive Stuart Gulliver said income from global banking and markets remained sluggish.

"The [interest rate] yield curve remained flat and it is hard to get the revenue," he said, noting that income would return only when the curve went positive.

HSBC's stock was up 2.9 per cent at 707.1 pence in London yesterday afternoon after the announcement. In Hong Kong, the stock closed 0.35 per cent lower at HK$85.10 before the results.

Gulliver had pledged to focus on controlling costs and an additional US$400 million was saved in the quarter, bringing total annualised, sustainable savings since 2011 to US$4.5 billion.

He said the remodelling of its business in North America would help improve the group's profitability and growth.

"The ongoing recovery of the US housing market and increased investor appetite may provide further opportunities to accelerate the run-down of our US consumer mortgage and lending portfolio," he said.