HSBC dividend disappoints as earnings surge

In a consistent theme for the bank reporting season, HSBC (HSBA) reported better than expected impairments for the half that flattered the bottom line as capital was released from ring-fenced funds. However, the return of interim dividends, though welcome, was pegged at a disappointingly low level, and left investors with the strong impression that the only group that consistently makes money from HSBC is its army of corporate lawyers. Clearly, management felt the need to mollify the market, by upping the pay-out ratio for dividends in the future to 55 per cent of net income, compared with 40 per cent now.

The bank also gave more details on how it will pare back its developed world operations to concentrate on the shift to Asia. As part of that process, it is putting its French retail banking operation, HSBC Continental Europe, on the block after signing a memorandum of understanding with Promontoria MMB SAS over a potential $2.3bn sale. Any sale would shift about $28bn of assets from the balance sheet, as well as $23.5bn of customer accounts. This follows on from an announcement in May that HSBC is also exiting from its North America retail banking business.

For all the talk of Asian pivots and the bright, sun-dappled pagodas of the East, getting its house in order everywhere else is taking an awful lot of time, effort, and money. The litigation in which the bank finds itself embroiled must be the most comprehensive ever listed and took up three pages of the interim results. These include, in no particular order: inquiries relating to sub-prime mortgages (15 years after the event), dodgy film finance schemes in the UK, allegations of precious metals price fixing, the Madoff affair, LIBOR (London Interbank Offered Rate) fixing, all of which are ongoing with as yet unquantified costs. There is even speculation that UK banks may face questions over money laundering allegations in the ongoing maxi-trial of the Ndrangheta clan - the Calabrian mafia.

In an age that cares about corporate ethical standards, HSBC’s traditional willingness to make markets with anyone, anywhere, no matter what the circumstances, looks increasingly untenable. In moving decisively to Asian markets, the bank’s management could be forgiven the desire for a quiet life. Consensus forecasts for HSBC, based on adjusted EPS, put the shares on a lowly forward P/E rating for 2022 of 6.6. That discount to its peers looks justified. Hold.

Last IC view: Hold, 428p, 23 Feb 2021