HSBC posts worst return to shareholders since global financial crisis

Bank’s chief executive and chairman take pay cuts

PUBLISHED : Monday, 22 February, 2016, 12:15pm
UPDATED : Monday, 22 February, 2016, 9:58pm

With costs growing faster than revenue last year, HSBC’s return-on-equity (ROE) of 7.2 per cent was its worst performance since the global financial crisis.

It was also worse than the 7.4 per cent return in 2014 and a setback in its plans to deliver a 10 per cent return to shareholders by 2017. It also fell short of analyst expectations of 8.7 per cent.

Ian Gordon, head of bank research at Investec said in London that HSBC’s 2015 performance was “a big miss” and made for “a miserable start to the year”.

We certainly hope for fresh cost reduction initiatives to go well beyond existing targets
Ian Gordon, Investec

“Given a weaker revenue outlook, we certainly hope for fresh cost reduction initiatives to go well beyond existing targets,” he said. “Without that the 10 per cent ROE target is likely to remain elusive – even by 2018.”

HSBC reported a loss of US$1.33 billion for the fourth quarter of last year and a 1 per cent year-on-year rise in pre-tax profit for all of 2015 to US$18.87 billion.

Having recently cancelled a pay freeze, HSBC saw increases in staff and compliance costs made worse by a massive tax bill in Britain. HSBC was also hit by a 17 per cent rise in bad debt charges to US$3.7 billion stemming from the worsening outlook in the oil and gas sector. “The US$1.5 billion UK bank levy charged in Q4 2015 offers a reminder of why we believe HSBC was mistaken in its decision last week to retain its UK domicile,” Gordon said.

HSBC chief executive Stuart Gulliver said that given the challenging conditions, he thought the bank’s performance had been “satisfactory”. He said HSBC should get to see “positive jaw” – faster growth in revenue that costs – in its results this year. He and his team remain committed to cutting 15 per cent of the bank’s cost base this year. Both Gulliver and HSBC chairman Douglas Flint had their pay cut last year. Gulliver had his total pay cut by 3.64 per cent to £7.62 million (HK$83.4 million), while Flint’s was cut by 1.54 per cent to £2.53 million.

Sabine Bauer, Fitch Ratings’ senior director, financial institutions, said: “The challenge for HSBC lies in rescaling the operating cost base and reallocating risk-weighted assets to more profitable businesses. Maintaining sound performance in the China-related business is crucial. This is a key concentration risk.”

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Bauer said HSBC had a total China exposure at US$143 billion at the end of last year. “From a rating perspective, we don’t mind if they go a bit slower,” she said.

Other than saying that he expected to receive a securities licence in Shenzhen’s Qianhai special economic zone this year, Gulliver offered no update on his plan to develop the bank’s business in the Pearl River Delta.

Hubert Tse, a partner at Shanghai-based law firm Boss & Young, is sceptical, saying “policies in Qianhai are not yet transparent – there is a question whether it is a proper, mature place to conduct business”.