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HSBC misses revenue forecasts, but progress is encouraging

The lending giant suffered due to market weakness during the fourth quarter
February 19, 2019

HSBC’s (HSBA) Asia pivot stands to make it a natural victim of ongoing US-China trade wars. Chairman Mark Tucker blamed market weakness during the fourth quarter for lower-than-expected revenue for 2018. Combined with a 6 per cent rise in adjusted operating expenses as the lender seeks to expand across the Northern China and Pearl Delta areas, this resulted in negative adjusted 'jaws' – the difference between the rates of change in revenue and costs – of 1.2 per cent.

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Economic uncertainty and reduced primary issuance led to lower adjusted rates and credit revenue, which partially offset stronger demand for securities services and global cash management liquidity for the global banking and markets business. Retail banking and wealth management was much stronger, posting an 8 per cent rise in net operating income. That business benefited from a 9 per cent rise in lending and improved deposit margins due to rising interest rates. Mortgage lending grew in the UK and Hong Kong, although margins shrank here. Life insurance manufacturing was another weak spot, with revenue falling by 11 per cent, reflecting adverse movements in market impacts of $0.3bn (£0.23bn) in 2018, compared with a favourable movement of $0.3bn in 2017.

Higher lending and adverse foreign exchange movements across business lines also resulted in an increase in adjusted risk-weighted assets, which reduced the common equity tier one (CET1) ratio to 14 per cent from 14.5 per cent in the prior year. However, the return on tangible equity improved by 1.8 percentage points to 8.6 per cent, with management reiterating its target to grow that figure to over 11 per cent by 2020.

Expected credit losses were slightly higher than loan impairment charges in 2017, reflecting "the uncertain economic outlook in the UK and heightened downside risks". Meanwhile, management also flagged softening credit quality in the UK.

Analysts at Shore Capital expect adjusted net tangible assets of 732¢ a share at the December 2019 year-end, up from 701¢ at the same time in 2018.

HSBC HOLDINGS (HSBA)   
ORD PRICE:635pMARKET VALUE:£133bn
TOUCH:635-635.3p12-MONTH HIGH:764pLOW: 596p
DIVIDEND YIELD:6.3%PE RATIO:13
NET ASSET VALUE:930¢LEVERAGE:14.9
Year to 31 DecTotal operating income ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201474.618.769.050
201571.118.965.051
201659.87.17.051
201763.817.248.051
201863.619.963.051
% change-0+16+31-
Ex-div:21 Feb   
Payment:08 Apr   
£1=$1.28