HSBC’s goal to restore bank’s return on equity not achievable this decade, say analysts
Longstanding dividend policy also likely to be dropped
In the aftermath of new troubles stemming from Britain’s Brexit, which have just added to HSBC’s existing challenges, analysts have concluded that chief executive Stuart Gulliver’s goal to restore the bank’s return-on-equity back above 10 per cent by 2017 – before the end of his tenure – won’t be achievable this decade.
Further, with earnings forecasted to be challenged for years to come, calls from analysts are growing louder saying the bank’s longstanding policy of paying generous dividends of 51 US cents has become unsustainable.
The grim outlook for HSBC’s future performance has come amid a muted reaction to Bank of England governor Mark Carney’s latest announcement to slash to zero the required countercyclical capital buffer rate that British banks must hold.
The move was sold by the BoE as a dovish policy that would allow the country’s banking sector to free up some £5.7 billion in reserves, which the central bank said could multiply to as much as £150 billion in market lending. But in Hong Kong on Wednesday, the day following the announcement, HSBC’s shares fell 1.16 per cent to HK$46.80, showing that investors viewed the BoE move in a negative light.
“Capital is not the issue – for [HSBC] or its UK bank peers. Loan growth and net interest margins are the challenge,” said Ian Gordon, head of banks research at Investec.
With the lender already showing negative loan growth in its core Hong Kong market which has traditionally been the source of its biggest profits, Gordon sees the real issue being tepid market demand for loans as well as the margins the bank could actually make on them.
HSBC chief Gulliver had an additional target of delivering a risk-weighted assets (RWA) reduction of around US$290 billion from the bank’s global books. The sale of its Brazil business in June should have helped shave US$37 billion off this target, but the problem so far is that there is little sign the bank is recycling the bulk of the money into actual productive use, say analysts.
Gordon believes the BoE’s move on Tuesday will give HSBC some welcome but non-priority relief with the RWA issue, but he said, “Show me the additional profit generative RWA and I’ll gladly put them in my model.”
He also said there was still no prospect of “meaningful uplift” for the next two to three years in HSBC’s Pearl River Delta strategy, a core area that the bank had pinned its hopes on as its next big growth driver.
Return-on-equity, a measure of how effectively HSBC could deploy capital to generate profits, has been in a slump for eight consecutive years at under the preferred 10 per cent level since 2008. Last year, HSBC delivered a return of 7.2 per cent.
Investec believes that figure could end up at just 4.4 per cent this year, compared to the 4.3 per cent level in 2009, HSBC’s last known worst performance in the aftermath of the Global Financial Crisis of 2008. This may climb to 5.3 and 6 per cent in 2017 and 2018 respectively, but Gordon said it will be 2019 at the earliest before HSBC could see any hope of achieving momentum again to hit Gulliver’s target.
Tom Rayner, executive director for equity research at Exane BNP Paribas, said he believes HSBC’s path to return to profitability will be challenged, adding that the bank’s 51 US cents per sharedividend doesn’t look sustainable for the next few years. “I don’t think it has made much difference to be honest. Interpretation is that it makes dividends harder to deliver as it needs to focus on loan growth,” he said.
Rayner said the bank faces the additional challenge of the outlook for European growth being under threat, meaning it will need greater dependence on its performance in China and the US.
With interest rates less likely to normalise in the current economic environment, Rayner said he saw more upward pressure on HSBC to deliver its RWA target and that “the walk back to profitability will not be for several years”.
The BoE disclosed on Tuesday that while British banks now hold four times more high quality liquid assets than they did before the 2008 financial crisis, and that it believes the UK banking system has the capacity to continue lending despite the stresses, projected bank losses in the next worst case scenario downturn could be twice as large as those incurred after 2008.
In its financial stability report the central bank explained the assumptions it used to conduct its stress test. “The 2015 stress-test scenario was based around a severe downturn in emerging market economies, Europe and the global economy, and a squeeze on net interest income as ‘bank rate’ was cut to zero. That test led to losses twice as large as those incurred in the global financial crisis,” the report said. The BoE’s present bank rate is set at just 0.5 per cent. Many believe a rate cut will be its next step.