HSBC Q1 Pre-tax Earnings Down on High Costs, Stock Falls 4%

HSBC Holdings HSBC recorded first-quarter 2018 pre-tax profit of $4.8 billion, down 4% year over year. The decrease was due to rise in investments.

Further, net income attributable to shareholders of $3.1 billion reflect 1% fall from the year-ago quarter.

In the pre-market trading, HSBC’s shares slipped 4% on the NYSE. This seems to be mainly due to mounting expenses as the company continues to make investments in the retail banking operations in its core markets of U.K. and China. Notably, the actual picture will emerge after the full day’s trading session, once investors and analysts go through the core results.

Results were adversely impacted by increase in operating expenses as the company continued to invest in growth programs. On the other hand, higher revenues and a decline in loan impairment charges acted as tailwinds. Further, capital ratios remained strong.

Revenues & Expenses Rise

Adjusted total revenues of $13.9 billion grew 3% year over year. The increase reflected higher revenues in all global businesses, partially offset by lower revenues in Corporate Centre.

Adjusted loan impairment charges and other credit risk provisions plunged 29% from the year-ago quarter to $170 million.

Adjusted total operating expenses rose 8% from the prior-year quarter to $8.2 billion. This reflected an increase in performance-related pay and investments in business growth programs.  

Quarterly Performance by Business Lines (adjusted basis)

Retail Banking and Wealth Management: The segment reported $1.9 billion in pre-tax profit, up 5% year over year. The increase was driven by higher revenues, partially offset by rise in operating expenses.

Commercial Banking: The segment reported pre-tax profit of $2.1 billion, increasing 12% from the year-ago quarter. The rise was largely driven by higher revenues.

Global Banking and Markets: Pre-tax profit for the segment of $1.7 billion declined 5% from the prior-year quarter. The decrease was primarily due to higher operating expenses and a rise in loan impairment charges.

Global Private Banking: Pre-tax profit for the segment was $113 million, surging 53% from the year-ago quarter. The significant improvement was largely driven by higher revenues.

Corporate Centre: The segment recorded a pre-tax profit of $0.2 billion, down 70% from the prior-year quarter. Lower revenues were largely responsible for the dismal segment performance.    

Improved Capital Ratios

Common equity Tier 1 ratio (transitional) as of Mar 31, 2018 was 14.5%, up from 14.3% as of Mar 31, 2017. Further, leverage ratio was 5.6%, up from 5.5% as of Mar 31, 20176.

Share Repurchase Plan

HSBC plans to initiate a share buyback of up to $2 billion, which is expected to start shortly. Given the growth opportunities, the company expects this to be the only share buyback plan for 2018.

Our Viewpoint

By disposing unprofitable/non-core operations, HSBC has been successful in its strategy to enhance efficiency. However, weak European and Chinese economies, low loan demand and litigation expenses will continue to limit the bank’s growth in the near term. Further, mounting operating expenses are expected to hurt its bottom-line growth to some extent.

HSBC Holdings plc Price, Consensus and EPS Surprise

 

HSBC Holdings plc Price, Consensus and EPS Surprise | HSBC Holdings plc Quote

Currently, HSBC carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

Deutsche Bank AG DB reported net income of €120 million ($147.5 million) in first-quarter 2018, which tanked 79% on a year-over-year basis. Lower revenues, mainly due to exchange rate movements and a rise in expenses were the undermining factors. However, reduction in provisions was a positive.

UBS Group AG UBS reported first-quarter 2018 net profit attributable to shareholders of CHF 1.5 billion ($1.6 billion), up around 19% from the prior-year quarter. Results displayed rise in net fee and commission income (up 3% year over year) and higher net interest income (up 3% year over year). However, the quarter reflected elevated expenses.

Barclays BCS incurred first-quarter 2018 net loss attributable to ordinary equity holders of £764 million ($1.06 billion). Net income attributable to ordinary equity holders was £190 million ($248 million) in the prior-year quarter. A fall in interest income and muted underwriting fees acted as headwinds. However, lower expenses, rise in trading income and decline in credit impairment charges supported the results.

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