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HSBC takes a hit on margins and oil and gas exposure

Loan impairment charges, the banking levy and restructuring costs are keeping costs high at the banking giant
February 22, 2016

Staying in the UK won't hide HSBC (HSBA) from its demons. A disappointing set of full-year results ended on a particularly sour note, with the group reporting a $0.9bn (£0.6bn) pre-tax loss during the final quarter. The group was forced to take loan impairment charges against its exposure to the oil and gas sector, in addition to ongoing customer redress costs. For the full year, the group's so-called 'Asia Pivot' did help nudge up reported pre-tax profits by a whisker. But after stripping out the effect of currency translations and other one-offs, adjusted pre-tax profits fell by 7 per cent to $20.5bn, as retail banking, wealth management and commercial banking all struggled.

IC TIP: Sell at 431.45p

The group's net interest margin - a measure of the average net interest produced by interest-earning assets - fell to 1.88 per cent from 1.94 per cent in 2015. This was driven by lower yields on mortgages in the UK due to competitive pricing, coupled with a fall in yields on new lending to consumers and companies in the low-rate environment. Retail banking, wealth management and commercial banking all struggled.

A $400m increase in the group's UK bank levy to $1.4bn drove up adjusted operating expenses by 5 per cent to $36.2bn, while severance costs and write-offs also contributed. HSBC's target is to grow revenue faster than adjusted operating expenses, referred to as 'positive jaws'. However, a tiny increase in adjusted revenue left jaws at minus 3.7 per cent. The group's return on equity fell marginally to 7.2 per cent, against a target of upwards of 10 per cent.

However, there was some good news on the banking group's restructure. Its global banking and markets business - the investment bank - grew its pre-tax profits by more than a fifth to $7.9bn. The group also reduced its risk-weighted assets by $124bn, which helped improve the group's common equity tier-one capital ratio to 11.9 per cent, compared with 11.1 per cent in 2014.

Analysts at Investec Securities expect tangible net assets per share of 708¢ at the end of December 2016, compared with 731¢ a year earlier.

HSBC HOLDINGS (HSBA)

ORD PRICE:431.45pMARKET VALUE:£84.9bn
TOUCH:431.4-431.55p12-MONTH HIGH:659pLOW: 420p
DIVIDEND YIELD:8.3%PE RATIO:9
NET ASSET VALUE:957¢LEVERAGE RATIO:13.8

Year to 31 DecTotal operating income ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201183.521.992.039
201282.520.674.041
201378.322.684.049
201474.618.769.050
201571.118.965.051
% change-5+1-6+2

Ex-div: 3 Mar

Payment: 20 Apr

£1=$1.43