Dismal Q1 Earnings for HSBC on Lower Revs - Analyst Blog

HSBC Holdings plc's (HSBC) earnings per share in the first quarter 2014 came in at 27 cents, 18% below the prior-year figure of 33 cents. Net profit came in at $5.1 billion, also down 18% from the year-ago quarter.

ADRs of HSBC were down nearly 1.4% in the pre-market trading at the time of writing this article, reflecting investors' bearish stance following the results. A better idea about investors' sentiments can be gauged from the stock's price movement during the trading session.

Adverse results were primarily due to a fall in top line, which reflected weaker revenue growth in Retail Banking and Wealth Management segment and disappointing results in Global Banking and Markets. Further, capital and profitability ratios also declined. However, fall in operating expenses and lower loan impairment charges were the positives.

Performance in Detail

The underlying profit before tax was $6.6 billion, declining 13% from the prior-year quarter. The fall largely reflected lower revenues, partially offset by a decrease in loan impairment charges and operating expenses.

Total revenue (on an underlying basis) was $15.7 billion, down 8% from $17.1 billion in the year-ago quarter due to non-occurrence or fall in significant items. Excluding these, revenue declined 2% due to fall in all revenue components.

Underlying total operating expenses dropped 2% year over year to $8.8 billion. The dip was primarily attributable to cost-saving initiatives being undertaken by the company as well as non-occurrence or fall in significant items. Notably, excluding these significant items, operating expenses increased 2% from the year-ago quarter due to increased investment in Global Standards, Risk and Compliance and wage inflation.

Underlying cost efficiency ratio increased to 56.3% from 52.6% in the prior-year quarter. A rise in efficiency ratio indicates fall in profitability.

Performance by Business Line (on underlying basis)

Retail Banking and Wealth Management: The segment reported $1.7 billion in pre-tax profit, up 4% from the prior-year quarter. The rise was driven by lower loan impairment charges and a fall in expenses.

Commercial Banking: The segment reported pre-tax profit of $2.4 billion, up 12% from the comparable last year quarter. The rise was mainly due to higher revenues and a decline in loan impairment charges, partly offset by slight rise in operating expenses.

Global Banking and Markets: Pre-tax profit for the segment was $2.9 billion, decreasing 19% year over year. The segment's results suffered due to lower revenues and a rise in loan impairment charges and operating expenses.

Global Private Banking: Pre-tax income for the segment was $201 million, compared with a pre-tax loss of $124 million in the prior-year period. The improvement was attributable to growth in revenues and lower expenses.

Other: The segment recorded a pre-tax loss of $566 million against a pre-tax income of $370 million in the year-ago period.

Profitability and Capital Ratios

Profitability and capital ratios deteriorated in the reported quarter. Annualized return on equity declined to 11.7% from 14.9% as of Mar 31, 2013. Also, pre-tax return on risk-weighted assets (annualized) decreased to 2.3% from 3.1% in the prior-year quarter.  

The company's core Tier 1 ratio as of Mar 31, 2014 fell to 11.9% from 13.6% as of Mar 31, 2013, reflecting a rise in risk-weighted assets. Moreover, total capital ratio also edged down from 16.6% as of Mar 31, 2013 to 15.0% as of Mar 31, 2014.

Our Viewpoint

HSBC is striving to boost its profitability amid the challenging market environment by disposing unprofitable/non-core operations. The company is poised to benefit from its extensive global network, strong capital position, cost containment measures, business re-engineering and solid asset growth.

However, high inflation in key Asian markets, sluggish loan growth, disappointing core operating performance and increased wage inflation will likely limit the company's growth in the near term.

HSBC currently carries a Zacks Rank #4 (Sell).

Performance of Other Foreign Banks

The Royal Bank of Scotland Group plc's RBS first quarter 2014 profit from continuing operations came in at £1.28 billion ($2.12 billion), rising more than twofold from £476 million ($739.4 million) in the prior-year quarter. Results benefited from lower loan impairment losses and reduced operating expenses. Additionally, the results reflected higher net interest income. However, reduced non-interest income was a negative.

Impacted by a disappointing top line performance, Deutsche Bank AG DB reported net income of €1.1 billion ($1.5 billion) in the first quarter of 2014, down from €1.7 billion ($2.2 million) in the year-ago quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

Barclays PLC BCS reported adjusted net income of £1,132 million ($1,873 million) for first quarter 2014, down 7% from the prior-year quarter. The fall was primarily due to the slump in investment banking income as the company continued to face tough trading conditions leading to lower client activities.