HSBC shares rally even as compliance costs bite

With first-half profit falling to miss market expectations, the bank will look for savings through job cuts and grow its mainland operations

PUBLISHED : Monday, 04 August, 2014, 10:45pm
UPDATED : Tuesday, 05 August, 2014, 6:46pm

HSBC profits are being squeezed by the twin pressures of rising regulatory compliance costs and low global interest rates that make profit growth increasingly difficult to achieve given the size of the bank’s deposit base.

“Can you induce growth in a balance sheet with US$1.3 trillion in deposits with these conditions?” Arun Melmane, a London-based analyst at Canaccord Genuity, told the South China Morning Post.

HSBC on Monday reported profits before tax for the first half of US$12.3 billion, a drop of 12 per cent year on year that fell short of analysts’ consensus forecast, while operating expenses excluding one-off items rose 4 per cent.

Melmane said the results, released after the market close in Hong Kong, were not surprising given the operating environment.

Investors in general appear to be giving the bank the benefit of the doubt on a turnaround strategy launched three years ago which has seen it shed more than 40,000 jobs, sell or close 60 businesses and deliver annual cost savings of more than US$5 billion.

HSBC shares traded 0.7 per cent higher at HK$80.60 in the opening 10 minutes of trade in Hong Kong. The bank’s London-listed stock gained about 1 per cent yesterday while the broad FTSE 100 index fell.

HSBC stock hit a year low last month following a warning from competitor, Standard Chartered, that its first-half profit could drop 20 per cent from a year ago. Investors have been steadily buying back HSBC shares since.

Asia, as in the past, drove growth in profits, generating US$7.89 billion before tax, although that figure fell more than 14 per cent from a year earlier.

A few factors could make the second half easier on HSBC, said Chirantan Barua, a senior analyst at Sanford C Bernstein in London.

HSBC remains highly sensitive to interest rates, so even small increases in rates in the United States or Britain, which are likely in the coming months, will boost the bank’s return on assets.

“Can it get worse from here? No,” Barua said.

The cost of compliance had come close to US$1 billion per year, he added.

While that was unlikely to fall, neither would it continue to increase, said Barua, who has an outperform rating on the bank.

Regulators have ordered HSBC to pay billions of dollars for misdeeds in recent years. Redress has dragged down profit growth in the retail and wealth management business, which accounts for about 40 per cent of group revenue.

As the outlook for economic growth on the mainland continues to brighten, HSBC will push ahead with growing its own business there as well as other investments including the Bank of Communications, group chairman Douglas Flint and chief executive Stuart Gulliver said in a telephone conference yesterday.

HSBC sold off its stakes in Bank of Shanghai and Ping An Bank last year. Questions arose on whether it would dump the 20 per cent it holds in Bocom after the mainland bank announced last week it was researching “mixed ownership” reform, implying that it could further diversify its ownership.

The interim report said Bocom had in part driven a 5 per cent increase in income from associates. However, HSBC officials stated that there was a risk of the mainland bank incurring impairment charges in the second half.

“I guess it’s all about relationships at the end of the day and being able to share the Bocom experience and enjoy the connections that it brings,” said Gary Greenwood, an analyst at Shore Capital Stockbrokers in London. “Even if the profits disappoint, it’s not something that is going to turn a profit-making bank into a loss-making one.”