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Costs hit HSBC

RESULTS: HSBC managed a generally resilient overall performance amidst tough conditions, but rising costs meant underlying profits slipped
February 27, 2012

Don't be too impressed by HSBC's pre-tax profit hike. Adjust for a $3.9bn (£2.45bn) gain from fair value movements on HSBC's own debt and underlying pre-tax profit slipped $1.2bn during 2011 to $17.7bn. That reflected higher costs, due to such factors as higher wages and an $898m provision against payment protection insurance claims. In fact, the bank's cost-to-income ratio rose 2.3 percentage points to 57.5 per cent.

IC TIP: Sell at 565.3p

Still, credit quality continued to improve – the total bad debt charge fell 14 per cent to $12.1bn – although HSBC still face a disproportionately heavy credit quality problem in North America as the troubled consumer finance arm there continued to be wound down. The North American impairment charge fell 15 per cent, but stands at $7bn, or 58 per cent of the group total. Yet, adjust for various gains, such as the sale of the stake in the Wells Fargo HSBC Trade Bank, and North America yielded a painful $870m loss.

HSBC's investment banking unit, the global banking and markets arm, had a rough ride, too. Pre-tax profits there slumped 24 per cent to $7bn as eurozone debt worries hit market sentiment. In fact, management says that helped depress the outcome for the bank's European operations as a whole, with underlying profits from the region down 61 per cent.

Even the usually robust Hong Kong division failed to impress – adjusted profits there rose edged up 5 per cent to $5.8bn, while the impairment charge jumped 37 per cent. As expected, the star performers came from emerging markets and, buoyed by strong loan growth in China and Singapore, the Rest of Asia Pacific division grew profits 27 per cent to $7.47bn. The unit's impairment charge dropped 39 per cent to just £267m, too. And a strong performance in Brazil helped the Latin American operation grow profits 29 per cent $2.32bn.

Prior to these figures, Charles Stanley was expecting EPS of 94¢ for 2012.

HSBC HOLDINGS (HSBA)

ORD PRICE:565.3pMARKET VALUE:£101bn
TOUCH:565.2-565.5p12-MONTH HIGH:728pLOW: 456p
DIVIDEND YIELD:4.3%PE RATIO:10
NET ASSET VALUE:884¢ 

Year to 31 DecPre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
200724.214487
20089.34193
20097.13434
201019.07334
201121.99239
% change+15+26+15

£1=$1.59