HSBC May Take Three Years to Meet Cost-Reduction Goal After Expenses Surge
HSBC CEO Stuart Gulliver
Kerem Uzel/Bloomberg
HSBC Chief Executive Officer Stuart Gulliver.
HSBC Chief Executive Officer Stuart Gulliver. Photographer: Kerem Uzel/Bloomberg
HSBC First-Quarter Profit Rises 58% on Bad Debt Provisions
Jason Alden/Bloomberg
The HSBC Holdings Plc headquarters, center, is seen in Canary Wharf, London.
The HSBC Holdings Plc headquarters, center, is seen in Canary Wharf, London. Photographer: Jason Alden/Bloomberg
HSBC Holdings Plc (HSBA) Chief Executive Officer Stuart Gulliver said it may take as long as three years to meet the bank’s cost-reduction target after expenses jumped in the first quarter.
Costs as a proportion of income rose to 60.9 percent from 49.6 percent, the London-based bank said in a statement today. Net income rose 58 percent to $4.15 billion from $2.63 billion in the year-earlier period, the lender said in its first detailed quarterly earnings report.
“We have increased our emphasis on cost management across the group, launching a number of cost-reduction programs during the period,” Gulliver said in the statement. The increase in operating expenses reflected higher staff costs at the investment banking unit and “in particular a provision of $440 million relating to payment protection insurance in the U.K.”
HSBC, which in January replaced Michael Geoghegan with Gulliver and cut its profitability target the following month, will outline a new strategy and detail its cost-reduction plans on May 11. Banks including Barclays Plc (BARC) and Lloyds Banking Group Plc (LLOY) are also reviewing their operations as regulators demand higher capital holdings to prevent a new financial crisis.
It may take until 2013 or 2014 for the bank to reach its target to cut expenses to between 48 percent and 52 percent of revenue, Gulliver told reporters today. “It’s hard to call it earlier than that,” he said. “This is a large firm.”
Cutting Costs
“He is going to have to lay out a clear path as to how he’s going to meet these cost targets because it’s really not clear at the moment,” said Christopher Wheeler, a banking analyst at Mediobanca SpA in London. “The big problem he faces in bringing down costs is that HSBC are in markets that are very hot.”
The stock fell 0.5 percent to 648.2 pence at the close in London for a market value of about 115 billion pounds. HSBC has gained 3 percent in the past 12 months, the second-best performer behind Standard Chartered Plc in the FTSE 350 index of Britain’s five-biggest banks.
The bank, Europe’s biggest by market value, has the highest cost-to-income ratio among its U.K. peers, according to data compiled by Bloomberg.
“They’ve had weak revenues and disappointing costs while loan losses are trending lower,” said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, who has a “buy” rating on the stock. “They need to show some stability and progression in pre-impairment profit.”
Gulliver Plan
Gulliver may detail plans to cut costs and withdraw from units or countries that don’t provide adequate returns, Rohith Chandra-Rajan, an analyst at Barclays Capital, said last week.
Pretax profit in Europe declined 65 percent to $652 million, reduced by the provision for U.K. customers improperly sold insurance on personal loans and a “lower contribution” from its investment banking unit, HSBC said. In Hong Kong, pretax profit rose 3.5 percent to $1.56 billion.
Pretax profit in North America, which includes the former subprime lender Household International, fell to $181 million from $450 million in the year-earlier period. The lender logged a $400 million impairment in the U.S. because of “changes in economic assumptions about the pace of recovery in home prices and delays in the timing of expected cash flows,” HSBC said.
HSBC North America returned to profit last year after three years of losses, asset sales and the culling of more than 6,000 jobs. The bank halted lending at its U.S. subprime unit in 2009 after racking up more than $58 billion in bad loan provisions.
Tax Charge Declines
Group net income was buoyed as its tax charge declined to $491 million in the first quarter, compared with $2.8 billion in the same period in 2010, HSBC said. The year-earlier figure was buoyed by the tax paid on the sale of HSBC Bank Canada to the lender’s U.K. unit, the bank said today.
Royal Bank of Scotland Group Plc (RBS) and Lloyds, Britain’s biggest government-assisted banks, posted losses for the first quarter, while Barclays recorded a drop in profit as investment banking revenue tumbled.
HSBC said in February net income more than doubled to $13.2 billion in 2010 from $5.83 billion the previous year, missing the $13.7 billion median estimate. The lender said at the time it will target a return on equity of 12 percent to 15 percent, instead of 15 percent to 19 percent.
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Jon Menon in London at jmenon1@bloomberg.net
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
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