HSBC’s Underlying Results Show that Developed Markets Remain a Drag on Profits

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HSBC reported attributable net income of USD 13.5 billion for 2012 (USD 5.3 billion in the second half), down 17% compared with 2011. However, these headline numbers were marred by a number of special charges, including a USD 5.2 billion non-cash own-debt charge (compared with a non-cash gain of USD 3.9 billion in 2011), a USD 2.3 billion provision for redress against misselling in the U.K., and a USD 1.9 billion fine for money-laundering activities in the U.S.

These charges were partially offset by USD 7.0 billion of gains on disposals in 2012. On an underlying basis, HSBC’s results show that the group’s performance is well ahead of many Europe-based peers but remains subpar compared with HSBC’s targets and investors’ expectations. Most of this underlying underperformance came from developed markets, where the bank faces the twin headwinds of legacy issues and slow economic growth. Fast-growing markets, conversely, reported strong results.

In Hong Kong, for example, underlying profit before tax grew 24% year over year to USD 7.2 billion and return on riskweighted assets there grew to an impressive 6.6% from 5.3% in 2011. Analysts were pleased to see that HSBC’s capital base continued to grow in the second half, and that the bank expects to reach a fully loaded Basel III ratio of 10.3% in 2013. The bank’s narrow moat remains firmly intact and that the rise of fast-growing markets will only deepen the need for an interconnected global trade bank like HSBC.

HSBC’s pro-forma Basel III ratio was 9.0% at the end of 2012 and should reach 10.3% in 2013 as certain planned actions are implemented. This makes HSBC one of the first fully capitalized European banks and raises the question of what it will do with its excess capital. Management announced an increase in the dividend to USD 0.45 (from USD 0.41 in 2011), and a USD 0.01 increase in 2013′s interim dividends to USD 0.10.

Management will have a significant amount of capital at its disposal, and we’ll watch for signs that capital is being deployed appropriately. During the conference call, management said that it planned to pursue organic growth opportunities in high-growth markets, especially in Asia.

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