Earnings at HSBC are set to remain under pressure for at least two more quarters as a change to the way it accounts for a key Chinese bank stake and the performance of its own investment banking business weigh on the numbers.
Analysts were bracing for the drag on growth during a conference call after HSBC revealed a 20 per cent year-on-year fall in profit for the first quarter.
Pre-tax profit was US$6.79 billion, in line with the US$6.75 billion average estimate of 10 analysts surveyed by the South China Morning Post.
Bank of Communications' earnings will probably stop being recognised as a share of net income for HSBC in the second quarter, as the carrying value of Bocom starts to exceed a cap by internal accounting standards, HSBC finance director Iain Mackay said yesterday.
Bocom contributed US$1.9 billion or nearly 8 per cent to group income last year.
"We anticipate an accounting reversal of a substantial portion of Bocom's contribution will provide a further material drag to HSBC's return on equity," said London-based Investec analyst Ian Gordon. "This reinforces our view the group will fail to achieve its 12 to 15 per cent [return on equity] target before 2018."
Looking into the second quarter, HSBC's chief executive Stuart Gulliver said in a statement it "continued to experience muted customer activity in April".
HSBC's first-quarter earnings were mainly hit by a drag in the investment banking business, as experienced by its banking rivals.
Gulliver said in the conference call the lender would see the second quarter as being "slightly weaker" than the first in terms of investment banking revenue because of seasonality and "tricky" market conditions.
The bank announced in May last year it would lay off a further 14,000 employees globally by 2016, on top of 42,000 jobs cut since last year.
It remains far from its target of a cost-income ratio of between 48 and 52 per cent. In the first quarter, that measure stood at 55.7 per cent.
HSBC made US$275 million in sustainable savings during the period and saw plenty more opportunities to reach its target of achieving US$2 billion to US$3 billion in annual cost savings, Mackay said.