Hong Kong company reporting season

HSBC’s Q4 earnings result misses estimates, shares plunge most in 18 months

Hong Kong shares price plunges by most in 18 months as bank misses expectations

PUBLISHED : Tuesday, 21 February, 2017, 12:34pm
UPDATED : Tuesday, 21 February, 2017, 11:29pm

(Corrects the CEO’s compensation to millions, from billions, in the 20th paragraph)

HSBC Holdings, Hong Kong’s largest bank and one of the city’s three currency issuers, announced on Tuesday worse-than-expected fourth-quarter results and a share buyback that was smaller than anticipated, sparking the biggest intraday plunge in its shares in 18 months.

HSBC reported a US$3.4 billion pretax loss for the three months ended December. When adjusted to remove one-off items, this became a pretax profit of US$2.62 billion, a rise of 39 per cent from the same period in 2015, but still missing the US$3.78 billion average estimate of six analysts compiled by Bloomberg.

“The miss was driven by lower revenues,” wrote Anil Agarwal, a banking analyst at Morgan Stanley in a report.

HSBC shares closed 5 per cent lower in Hong Kong trading after results were announced, dropping more than 6 per cent in early London trading.

“HSBC missed on income and capital, and the [share] buyback at US$1 billion was less than expected,” wrote Chirantan Barua, an analyst at Bernstein Research.

For 2016, unadjusted pre-tax profit was down 62 per cent, or broadly flat once adjustments for one-off items were taken into account.

The one-off items included US$3.1 billion in 2016 on cost cutting measures, and the removal of a notional US$3.2 billion of value in its private banking business that it had attributed to its acquisition of Safra Republic Holdings in 1999.

“We should not pay too much attention to the “goodwill write-down,” said Neil Smith, a banking analyst at German private bank Bankhaus Lampe, referring to the latter change. “Such things are not unique to HSBC and are a sign of the market environment.”

A buyback is when a company purchases some of its existing shares, thus reducing the number in circulation, and so boosting the amount of revenue proportional per share.

On August 3, HSBC announced in its interim profit statement that it would buy back US$2.5 billion of shares, the first time it had done so in its history. The announcement helped the bank to post the best performance of any European bank since the June 23 vote to take Britain out of the European Union.

HSBC will fund the share buyback using capital raised from the 2016 sale of its Brazilian operations.

The bank has additional spare capital in its US operations, which it’s seeking to repatriate, and there had been speculation that this would provide scope for a larger buyback to be announced Tuesday, or later in the year.

“There is an enormous amount of talk and some disappointment at the scale of the buyback,” Bankhaus Lampe’s Smith said.

Speaking on a call to analysts, the bank’s chief executive Stuart Gulliver dampened such expectations.

“If we have excess capital, the first thing we’ll look to do with it is to redeploy it within the business, “ he said. “The second is use it to support the dividend, and only then will we use it to buy back more shares. You should not assume that we’ve entered an era of regular buybacks.”

Gulliver’s own compensation was affected this year due to compliance failings in the bank’s US operations.

In 2012, HSBC paid US$1.9 billion to settle money laundering violations with US regulators. The settlement included a deferred prosecution agreement, as part of which the US Department of Justice agreed not to prosecute HSBC, but the bank agreed to install a monitor to assess its progress in improving anti-money laundering policies.

HSBC’s chairman Douglas Flint told a media call that Gulliver’s bonus was reduced following the report from the monitor which criticised the slow pace in adopting the new policies.

The agreement is due to expire this year, but could be extended or the bank could even be prosecuted if the Department of Justice considers HSBC to be in breach of the agreement.

Nonetheless, achievements elsewhere meant Gulliver’s total remuneration for 2016 rose to £7.7 million (US$9.5 million), up from £7.3 million in 2015.

Flint is due to step down this year, but the bank said that no successor has been chosen.

“We said we would announce Douglas’ successor in 2017, and we are only seven weeks in, give us a little bit of time,” Gulliver said.