HSBC Falls After Earnings as Gulliver Says Markets Slow

HSBC Holdings Plc (HSBA), Europe’s biggest bank, slid in London and Hong Kong trading after profit missed analysts’ estimates and Chief Executive Officer Stuart Gulliver said fast-growing emerging markets are slowing.

First-half net income rose 22 percent to $10.28 billion after U.S. loan impairments fell, the London-based lender said yesterday in a statement. That was less than the $10.57 billion estimate of five analysts surveyed by Bloomberg.

The shares fell 4.4 percent in London, the most since November 2011, while the Hong Kong stock was poised for its biggest slump in a year. HSBC, which operates in about 80 countries, said the mainland Chinese market slowed unexpectedly in the first quarter, while Latin American growth eased in the first half on weak consumer consumption. HSBC also faces a potentially “highly damaging impact” from planned European Union restrictions on bonuses, the bank said.

“It’s a challenging operating environment for HSBC,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong, said in an e-mailed reply to questions from Bloomberg. “The negative of sluggish revenue growth and weak Latin American operations took its toll.”

Growth remains “subdued” in western economies, the company said. Gulliver has reversed the lender’s expansion in U.S. consumer banking and closed or sold 54 businesses since he took the top job in 2011 as he focuses on markets where the firm is most profitable. The bank has 55 million customers and 6,600 offices worldwide.

Photographer: Jerome Favre/Bloomberg

HSBC Holdings Plc Chief Executive Officer Stuart Gulliver said, “Economic growth remained muted and regulatory changes continued to impact available returns but, by focusing on the markets and business areas where we have comparative strength and competitive advantage, we have successfully progressed the repositioning of the business to accommodate these factors.” Close

HSBC Holdings Plc Chief Executive Officer Stuart Gulliver said, “Economic growth... Read More

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Photographer: Jerome Favre/Bloomberg

HSBC Holdings Plc Chief Executive Officer Stuart Gulliver said, “Economic growth remained muted and regulatory changes continued to impact available returns but, by focusing on the markets and business areas where we have comparative strength and competitive advantage, we have successfully progressed the repositioning of the business to accommodate these factors.”

Business Cycle

China’s economy has slowed for two straight quarters, extending its longest streak of sub-8 percent expansion in at least two decades.

“Even emerging markets go through business cycles, and this has impacted our revenue and our profit growth,” Gulliver, 54, told reporters on a conference call.

Net interest margin narrowed to 2.17 percent from 2.37 percent as lending rates declined, while loans to customers dropped 2.7 percent to $433 billion as the lender shed businesses.

HSBC’s Hong Kong shares sank 4.5 percent to HK$85.50 as of 10:25 a.m. local time, poised for the biggest slump since July 23, 2012. The London stock fell 33 pence yesterday to 721.7 pence, reducing their gain this year to 12 percent.

“There is little in these results to alleviate fears around the revenue line,” Mark Phin, an analyst at Keefe Bruyette & Woods who rates HSBC shares outperform, said in an e-mailed note.

Photographer: Simon Dawson/Bloomberg

The headquarters of HSBC Holdings Plc, center, stands in London. Close

The headquarters of HSBC Holdings Plc, center, stands in London.

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Photographer: Simon Dawson/Bloomberg

The headquarters of HSBC Holdings Plc, center, stands in London.

Lower Yields

HSBC partly missed estimates because it was hurt by shrinking yields on its lower-risk investments, according to Sandy Chen, an analyst at Cenkos Securities Plc who rates the shares a buy.

Income at the lender’s balance-sheet management business, which invests in assets such as central bank deposits and government bonds, fell 24 percent to $1.68 billion.

Loan impairments dropped 35 percent to $3.1 billion. Revenue excluding businesses that have been sold, as well as gains and losses on the value of the bank’s debt, rose 4 percent to $33.3 billion.

Operating expenses fell 13 percent to $18.4 billion as wage costs declined. The lender reported a cost efficiency ratio of 54 percent, exceeding the firm’s 2011 target range of 48 to 52 percent. In May, the company set a target for 2014 to 2016 of a ratio in the “mid-50s.”

The bank set aside $367 million to compensate consumers sold loans insurance they did not want, need or understand. Barclays Plc set aside 1.35 billion pounds ($2.1 billion) in the same period.

Investment Banking

“Economic growth remained muted and regulatory changes continued to impact available returns,” Gulliver said in the statement.

The lender’s investment banking business, led by Samir Assaf, posted pretax profit of $5.72 billion, up from $5.05 billion a year earlier, on reduced costs and impairments. That beat the $5.48 billion estimate from Citigroup Inc. analysts led by Andrew Coombs.

HSBC said bonuses at the investment bank fell during the first half, while fixed pay rose.

“While HSBC reported better-than-expected revenue in its global banking and markets, as well as lowering performance-related pay, rising wages undid much of the cost management,” Jonathan Tyce, a senior banking analyst at Bloomberg Industries, wrote in a note to clients.

Competitive Pay

HSBC ranked fourth in arranging global equity, equity-linked and rights offerings in the first half, according to data compiled by Bloomberg. Goldman Sachs Group Inc. was first.

“We’re very confident that we will be able to come up with a competitive remuneration proposal,” Chairman Douglas Flint told journalists on the call when asked about proposed EU caps on bonuses. Raising salaries is “one option,” he added.

The lender, which last year agreed to pay $1.92 billion to settle U.S. probes of money laundering, said in May it will eliminate as many as 14,000 more jobs as it plans to cut an additional $3 billion of costs to improve profitability.

Michael Cherkasky, former CEO of Altegrity Inc. and Marsh & McLennan Cos., was selected as an independent monitor for HSBC under its settlement with U.S. regulators, the bank said.

Asset Sales

HSBC completed the sale of its U.S. credit-card unit to Capital One Financial Corp. for a premium of $2.5 billion in May 2012, and sold a $3.2 billion portfolio of U.S. consumer loans in March. The lender is cutting back in the U.S. after its 2003 purchase of Household International Inc. required it to set aside more than $65 billion for souring loans in the country.

The pace of asset sales will now slow, Gulliver said yesterday. As well as the loan portfolio and cards business, HSBC closed the sale of its upstate New York branch network to First Niagara Financial Group Inc. in the first half of last year.

Last week, the bank appointed PricewaterhouseCoopers LLP as auditor, dropping KPMG LLP after more than two decades. KPMG won the business in 1991 without going through a bidding process, the lender in March. HSBC paid the accounting firm $80.5 million in 2012 for work including audit, tax compliance, computer security and help valuing assets.

Last month, James Comey, a former U.S. deputy attorney general whom the bank named in January to become a non-executive director and member of its panel to combat financial crime, resigned to lead the Federal Bureau of Investigation.

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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