HSBC Net Income Set to Rise With Standard Chartered Fueled by Asia Growth

HSBC Holdings Plc (HSBA) and Standard Chartered Plc, Britain’s two best-performing bank stocks last year, may say full-year profit rose as growth in Asia eclipsed the stagnating U.K. economy.

HSBC may next week say earnings climbed 24 percent to $16.3 billion from the year-earlier period, helped by an accounting gain on the revaluation of its own debt, according to the median estimate of 19 analysts surveyed by Bloomberg. Net income at Standard Chartered will probably climb 9 percent to $4.73 billion, according to the median estimate of 17 analysts.

Standard Chartered’s increase in revenue may surpass HSBC because the latter is still shrinking its U.S. division and trying to reduce costs by retreating from less profitable markets, analysts said. Standard Chartered is also more focused on Asia: three-quarters of its assets are in the region, compared with 27 percent for HSBC, data compiled by Bloomberg show. More than half of HSBC’s Asian assets are in Hong Kong, where the bank was founded in 1865.

Standard Chartered is “proportionately more exposed to Asia and emerging markets and their sales may be helped by their exposure to those markets,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London who rates both lenders a buy. “Our preference is with Standards over HSBC.”

Photographer: Jerome Favre/Bloomberg

Standard Chartered’s increase in revenue may surpass HSBC because the latter is still shrinking its U.S. division and trying to reduce costs by retreating from less profitable markets, analysts said. Close

Standard Chartered’s increase in revenue may surpass HSBC because the latter is still... Read More

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Photographer: Jerome Favre/Bloomberg

Standard Chartered’s increase in revenue may surpass HSBC because the latter is still shrinking its U.S. division and trying to reduce costs by retreating from less profitable markets, analysts said.

Asia Opportunities

Officials at the banks declined to comment before they report results. London-based bank HSBC is scheduled to publish earnings on Feb. 27 at 8.15 a.m. local time and its competitor on Feb. 29 at 4.30 a.m. London time.

Standard Chartered fell 18 percent in 2011, valuing it at 1.5 times the value of its assets. HSBC fell 25 percent in the year, valuing it at its book value, according to data compiled by Bloomberg. European lenders trade at about 1.05 times their book value. Half of the analysts that track Standard Chartered rate it a “buy” compared with 60 percent for HSBC.

“Standard Chartered is best-exposed to the growth opportunities of Asia,” said Espirito Santo analyst Shailesh Raikundlia in a note to clients on Feb 6. “Although both banks will continue to outperform their European peers in terms of growth, we expect Standard Chartered’s growth to outpace that of HSBC.”

Standard Chartered’s revenue will rise 10 percent to $19.4 billion in 2012 from 2011, while at HSBC the same measure will fall 1.1 percent to $70.8 billion, Bloomberg estimates show.

Falling Loan Demand

HSBC rose 0.9 percent to HK$70.80 as of 11:43 a.m. in Hong Kong, while Standard Chartered gained 0.8 percent to HK$199.60.

Standard Chartered has 18 percent of its assets in Hong Kong, 14 percent in Singapore, 11 percent in Korea, 7 percent in India and 26 percent in the Middle East and other parts of Asia, according to data compiled by Bloomberg. Even though HSBC focuses on emerging markets, about two thirds of its assets are in Europe and North America, compared with about 21 percent for Standard Chartered in 2010. HSBC’s full-year revenue in Hong Kong will drop 2.6 percent to $14.57 billion on falling loan demand, said Ian Gordon, an analyst at Investec Plc in London in a note to investors this month.

HSBC has about $5.5 billion of holdings of peripheral European sovereign debt, according to Steven Chan, an analyst at Citic Securities International Co. Ltd. By comparison, Standard Chartered (STAN) has “no direct sovereign exposure to Portugal, Ireland, Italy, Greece and Spain,” it said on Aug. 3.

“The market still has concerns over HSBC’s exposure to the sovereign debt” of these nations, Chan said in a note to clients on Feb. 10.

Subprime Costs

HSBC may face additional costs from U.S. subprime lending. Some U.S. states have introduced moratoriums on foreclosures, which added to the lender’s third-quarter provisions, HSBC said in November.

“They’re seeing that if people can default and stay in their homes, there’s very little incentive for overstretched borrowers to pay their mortgages,” said Bruce Packard, an analyst at Seymour Pierce in London. “It’s an overhang.”

The lender has so far set aside more than $65 billion for souring loans in North America following its purchase of Household International Inc. in 2003.

HSBC Chief Executive Officer Stuart Gulliver in August announced plans last year to cut costs by $3.5 billion over the next two years to boost profit.

Asset Sales

The bank has announced sales of divisions and assets valued at $4.89 billion since in May, according to data compiled by Bloomberg. HSBC has sold units in Japan, South Korea and Thailand. In January, it agreed to sell operations in Costa Rica, El Salvador and Honduras to Colombia’s Banco Davivienda SA for $801 million to focus on bigger markets in Latin America.

HSBC will sell its U.S. card and retail services unit to Capital One Financial Corp., who will pay a premium of about $2.6 billion premium to the division’s loans, HSBC said on Aug. 10. The deal may be completed in the second quarter, Capital One said on Feb. 8.

Gulliver in November said the bank’s return on equity, a measure of profitability, would be at the “softer end” of its 12 percent to 15 percent target by 2013.

“Unfortunately, for Stuart and his owners, even if he does not abandon his targets, we fear that, at the very least, he will be forced to defer them,” because the bank is “too reliant” on investment banking, said Gordon. “We forecast a return on equity in 2013 of just 10.4 percent.”

Market Retreat

Pretax profit at HSBC’s investment bank’s may fall 22 percent to $7.19 billion, according to Morgan Stanley analyst Chris Manners. Last year, the division has accounted for 50 percent of HSBC’s pretax profit, data compiled by Bloomberg show. Barclays Plc, the U.K.’s third-largest bank by assets, said this month pretax profit at its securities unit fell 32 percent to 2.97 billion pounds ($4.66 billion).

Gulliver said in August he will eliminate 30,000 roles by the end of 2013, withdrawing from some markets, while hiring people in Asia. Standard chartered said in December it would add 2,000 people.

Both banks have said investors have asked them to consider relocating outside the U.K. amid increased regulation. The proposals by the U.K. government-sponsored Independent Commission on Banking to make banks carry more loss-absorbing capital would cost HSBC $2.5 billion, according to the bank.

‘Complicated Distraction’

HSBC Chairman Douglas Flint told parliamentarians on Nov. 23 that if it relocated, it would choose a place where it already had a “big presence,” though the question was still hypothetical. Standard Chartered CEO Peter Sands said in December moving would be a “complicated distraction.”

The U.K.’s Royal Bank of Scotland Group Plc yesterday posted a loss of 2 billion pounds on impairments in Ireland, writing down Greek debt and compensating customers for improperly sold insurance. Lloyds Banking Group Plc is estimated to report a 2.41 billion-pound loss for 2011, according to a Bloomberg survey of 14 analysts.

The following is a table of analysts’ median estimates in millions of dollars. The column on the right shows the number of analysts surveyed by Bloomberg.

              2010 Earnings      2011 Estimated     No. of
              Actual             Earnings           Analysts

HSBC

Net income    13,159             16,335               19

Pretax
Profit        19,037             22,016               26

Revenue       68,247             71,658               19

Return on
Equity           9.5               10.9               25


Standard Chartered

Net Income     4,332              4,726               17

Pretax Profit  6,122              6,851               28

Revenue       16,062             17,581               22

Return on
Equity          14.1               12                 20

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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