HSBC’s 2013 Profit Misses Estimates on Cost Reductions

Photographer: Brent Lewin/Bloomberg

HSBC Holdings Plc, which gets most of its profit from Asia, is focusing on its most lucrative markets amid increased regulation and compliance costs. Close

HSBC Holdings Plc, which gets most of its profit from Asia, is focusing on its most... Read More

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Photographer: Brent Lewin/Bloomberg

HSBC Holdings Plc, which gets most of its profit from Asia, is focusing on its most lucrative markets amid increased regulation and compliance costs.

HSBC Holdings Plc (HSBA), Europe’s largest bank, posted full-year profit that missed analyst estimates as a cost-cutting drive fell short of targets and revenue shrank. The stock slumped in Hong Kong and London.

Pretax profit for 2013 rose 9 percent to $22.6 billion from $20.7 billion in the year-earlier period, the London-based bank said in a statement yesterday. That was lower than the $24.6 billion median estimate of 30 analysts surveyed by Bloomberg. HSBC’s Hang Seng Bank Ltd. (11) unit in Hong Kong posted record earnings for the year, boosted by an accounting gain.

HSBC, which gets most of its profit from Asia, is focusing on the most lucrative markets amid increased regulation and compliance costs. While Chief Executive Officer Stuart Gulliver has closed or sold 63 businesses since 2011, costs are running above his target of about 50 percent of revenue, while return on equity, a measure of profitability, is still short of his goal.

“The miss is driven by revenue softness and costs not falling as much as expected,” said Ian Gordon, an analyst at Investec Plc in London with a buy recommendation on the shares. “The dividend is also below expectations.”

HSBC will pay a 19 cent dividend for the fourth quarter, bringing the total for the year to 49 cents a share, less than Gordon’s 52-cent prediction.

The lender’s shares slumped 2.4 percent, the most in three weeks, to HK$81.85 as of 9:35 a.m. in Hong Kong. The bank’s stock in London sank 2.8 percent to 635.7 pence yesterday, taking its loss this year to 4 percent.

Leaner Bank

Costs fell to $38.6 billion from $42.9 billion, missing the $37.9 billion average estimate of 15 analysts surveyed by the bank. Expenses as a proportion of revenue fell to 59.6 percent from 62.8 percent. That compares with Gulliver’s “mid-50s” target for 2014 to 2016.

Return on equity climbed to 9.2 percent from 8.4 percent in 2012, still short of the company’s goal of 12 percent to 15 percent.

“The group is leaner and simpler than in 2011 with strong potential for growth,” Gulliver said in the statement. “Our strong capital generation continues to support our progressive dividend policy.”

Revenue after insurance claims fell to $64.6 billion from $68.3 billion in the year-earlier period. Loan impairment charges fell to $5.85 billion from $8.31 billion on lower bad debts in North America and Europe, the bank said.

HSBC said yesterday the recent rout in developing markets presented no “generalized threat.”

‘Greater Volatility’

“We remain optimistic about the longer-term prospects for emerging markets,” Gulliver said. “Nevertheless, we anticipate greater volatility in 2014 and choppy markets as adjustments are made to changing economic circumstances and sentiment.” HSBC generates most of its income from emerging markets.

HSBC is exiting businesses that aren’t profitable, aren’t big enough in a given market or could harm the bank’s reputation.

The lender is planning to sell parts of its Swiss private bank and hired Campbell Lutyens & Co. to consider the sale of its direct investment unit, people familiar with the matter said earlier this month. In December, it agreed to sell its 8 percent stake in Bank of Shanghai Co. to Banco Santander SA. (SAN)

Gulliver Bonus

Gulliver’s bonus more than doubled to 1.8 million pounds ($3 million) for 2013. The bonus pool for the lender’s global banking and markets investment-banking business rose to $1.33 billion from $1.27 billion.

Under EU rules, banks are banned from paying bonuses more than twice a senior employee’s salary. A total of 665 of HSBC’s senior managers, including Gulliver and Finance Director Iain Mackay, will receive a fixed pay allowance which is neither salary nor bonus to circumvent the rules. Of those, 111 will receive the allowance in shares and 554 in cash, according to the bank’s annual report.

“It’s much more complicated. I think we had a compensation plan that shareholders liked,” Gulliver said on a conference call with journalists yesterday. “Sadly because of the EU directive we’ve had to change.”

Pretax profit at the firm’s private bank fell to $193 million, from $1 billion in 2012 as it wrote down the value of its Monaco business and an asset sale in 2012 wasn’t repeated. HSBC reported regulatory investigation provisions of $352 million at its private bank and said it continued to cooperate with a U.S. Department of Justice investigation into whether the bank helped Americans hide money from the Internal Revenue Service.

GBM Revenue

Fourth-quarter revenue at the lender’s global banking and markets division fell 4 percent from a year earlier, Bernstein Research analyst Chirantan Barua estimated in a note to clients yesterday. That compares with a 15 percent fall at Barclays Plc and a 16 percent fall at Deutsche Bank AG, according to Barua, who has an outperform rating on the bank.

Retail banking and wealth management pretax profit fell 31 percent to $6.65 billion after the bank sold some U.S. branches in 2012.

The U.K. bank levy on HSBC’s balance sheet rose to $904 million from $571 million as the rate increased. This extra cost may not have been accounted for by analysts in their estimates, HSBC’s Mackay said on the call with reporters.

Hang Seng

Hang Seng Bank’s 2013 net income climbed 38 percent to HK$26.7 billion ($3.4 billion) from HK$19.3 billion a year earlier, the lender said in a filing to the Hong Kong exchange after the city’s stock markets closed yesterday. The earnings compared with the HK$25.7 billion average of 15 estimates compiled by Bloomberg.

The lender, 62 percent owned by HSBC as of December, recorded an accounting gain of HK$9.52 billion in the first half after it changed its treatment of a stake in China’s Industrial Bank Co. (601166) Hang Seng’s net interest income and its fee businesses performed better than expected, according to UOB Kay Hian (Hong Kong) Ltd. analyst Edmond Law.

Shares of Hang Seng Bank, Hong Kong’s second-largest local lender by market value, advanced 0.6 percent to HK$125.80, the highest intraday level since Jan. 3. The stock is little changed this year.

Net interest income, the difference between what the bank makes from lending and what it pays on deposits, rose 9.8 percent last year, Hang Seng said. Net fee income, mainly from services such as credit cards, funds, stockbroking and insurance, jumped 15.7 percent.

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

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net

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