World economic recovery key to HSBC growth

Analysts say the banking giant's prospects depend on how developed countries fare and the timing of interest rate increases in the US

PUBLISHED : Tuesday, 25 February, 2014, 1:24am
UPDATED : Tuesday, 25 February, 2014, 5:17am

HSBC's revenue and profit prospects are likely to rest on the pace of economic recovery in developed countries and the timing of interest rate increases by the United States Federal Reserve, given strengthening headwinds in the bank's key emerging market operations.

Analysts reckon the bank has squeezed almost all the benefits it can from a massive restructuring effort that Stuart Gulliver launched when he took the helm of Europe's largest lender in 2011.

While billions of dollars have been saved since by the closure or disposal of 63 businesses and the axing of thousands of jobs, HSBC is still short of key targets that it had promised investors it would hit as part of the plan to get back on track after it was battered along with others in the 2008-09 financial crisis.

"The key catalyst for HSBC's revenue is primarily driven by any interest rate hikes in the next 12 months as the deposit-rich lender is adversely impacted by the near-zero interest rates," said Vivek Raja, an analyst with Oriel Securities in London. "The upside surprises for the bank should come from the ongoing recoveries in Europe and the US."

However, Raja said, problems would persist in emerging markets "due to macro headwinds and slowing economic output".

The Group of 20 summit ended in Sydney on Sunday with a call to boost global economic output by 0.5 per cent a year over the next five years, cementing a change of tone for developed economies following years of post-financial-crisis austerity.

Gulliver gave investors little prospect of any near-term upside given prevailing economic conditions, which he said were subject to "greater volatility in 2014 and choppy markets".

But he again flagged the long-term potential the bank sees in its business model, which gives it unrivalled exposure in emerging markets - particularly Asia - where about half of global economic output is generated and likely to become the main driver of growth in the coming decade.

Jim Antos, an analyst at Mizuho Securities in Hong Kong, said investors were likely to see the balance of risks from emerging markets being more of a bind than a boon in the short term.

"Some investors may also have viewed HSBC's substantial business in emerging markets in Latin America and Asia as a source of risk," Antos said, after HSBC shares sank in response to results which missed market expectations.

Shares in HSBC traded down 3.5 per cent in London yesterday afternoon after the group said revenue fell 5 per cent last year to US$64.6 billion. Pre-tax profits rose 9 per cent to US$22.6 billion, about 9 per cent below the US$24.7 billion analysts had expected.

HSBC's share price has underperformed its major rivals, dropping 2 per cent in the past year as return on equity failed to reach double digits. However, it had gained about 7 per cent since February 6 in the run-up to the earnings announcement.

HSBC ruled out a share buy-back this year, while reiterating its profitability target of a 12 to 15 per cent return on equity.