HSBC Holdings Plc and Standard Chartered Plc, the two U.K. banks most reliant on Asia for earnings, may next week say profitability in the region is being squeezed by both international and domestic competitors.
U.S. banks including Citigroup Inc. are expanding in Asia again after retreating during the financial crisis, placing pressure on HSBC and Standard Chartered as they compete for revenue and employees. Chinese lenders such as Industrial & Commercial Bank of China Ltd. are maintaining their grip in their domestic market, leaving overseas lenders with a 2 percent share, according to estimates by PricewaterhouseCoopers LLP.
“You’ve got margin pressure” on both deposits and loans in Hong Kong and across Asia, said Ian Gordon, an analyst at Exane BNP Paribas SA in London with an “underperform” rating on the stock. “Returning international competitors, as well as mainland Chinese banks, are becoming more aggressive -- most certainly in Hong Kong. There are plenty of headwinds.”
HSBC will report full-year earnings at 8:15 a.m. in London on Feb. 28 and Standard Chartered two days later. The banks, both of which have operated in Asia for more than a century, are focusing on emerging markets as their growth outpaces that in Europe and the U.S. HSBC made more than half of its first-half profit from Asia and Standard Chartered about 75 percent.
Competition in Hong Kong and across Asia is “almost entirely” responsible for a drop in the banks’ net interest margin, the difference between what banks earn on loans and what they pays on deposits and funds, Gordon said. HSBC, in particular, is replacing more profitable loans in the U.S. with less lucrative loans in Asia, he said.
Net Interest Margin
HSBC’s net interest margin will decline to 2.83 percent from 2.94 percent, according to Deutsche Bank AG analysts Jason Napier and David Lock, while the measure will drop to 3.52 percent from 3.76 percent at Standard Chartered.
Both banks take in more in deposits from clients than they lend. HSBC’s loan-to-deposit ratio was 78 percent at June 30, while Standard Chartered’s was 76 percent.
The profitability of deposits is declining as banks try to retain clients with higher interest rates, while the two haven’t benefited from an increase in the profitability of mortgage lending in the same period, according to analysts including Simon Willis at Daniel Stewart & Co. in London.
“We would expect HSBC’s management to be making comments that it’s very difficult to improve spreads in Asia because there’s a thriving and aggressive competition in pretty much every market,” said Simon Maughan, co-head of European equities at MF Global U.K. Ltd. in London. “Loan losses are low, Asian markets are strong and property prices are rising. Typically in that environment, banks get into extreme margin competition.”
HSBC and Standard Chartered are also paying more to attract employees to their investment banks as revenue from the region jumps, said Maughan. Citigroup plans to increase its workforce in China to 12,000 in three years, according to Asia-Pacific Co-Chief Executive Officer Stephen Bird.
Standard Chartered in December said costs would rise faster than revenue in 2010, after hiring about 7,000 staff. Ex-HSBC CEO Michael Geoghegan said in November the bank was “seeing a lot more competition coming into the region. That in itself will change pricing. There will be a big challenge for skills.”
HSBC didn’t seek direct government aid to bolster capital during the financial crisis, and raised $17.8 billion from investors in a rights offering in 2009. Stuart Gulliver, 51, the former investment banking head, succeeded Geoghegan in January.
‘Not Seeing Benefits’
“HSBC has come through the crisis very well but they are not seeing the benefits of that as much as they should have,” said Bruce Packard, an analyst at Seymour Pierce in London. “They are still competing against all the same people that were around three years ago,” including Citigroup, which received a $45 billion U.S. government bailout, Packard said.
HSBC, which bought subprime lender Household International in 2003, closed its U.S. consumer finance unit to new clients two years ago after setting aside more than $58 billion to cover bad loans. That decision has crimped revenue, which is expected to rise 4.8 percent to $69.27 billion, the analysts said.
HSBC may say profit for 2010 more than doubled as provisions for bad loans at its U.S. unit halved. Net income probably rose to $13.91 billion from $5.83 billion in 2009, according to the median estimate of 15 analysts surveyed by Bloomberg. Even so, provisions probably declined 47 percent to $14.06 billion.
Standard Chartered will probably say 2010 profit rose 25 percent to $4.2 billion as provisions declined, according to the median estimate of 17 analysts.
“Standard Chartered has been growing its loan book faster than HSBC and that’s been consistent post the crisis and that alleviates some of the pressure” on margins, said Willis. “HSBC has been focused on addressing the issues in the U.S.”
HSBC reduced customer loans by 15 percent to $893 billion in the two years to June 30 2010, according to company filings. Standard Chartered increased loans by 23 percent to $215 billion in the period, filings show.
HSBC’s stock is almost unchanged in London trading in the past year, making it the worst-performer among the FTSE 350 banks. Standard Chartered has climbed 9.7 percent and trades at about 13 times estimated earnings. HSBC is at 15 times.
The table below shows analysts median estimates for 2010 in millions of dollars for HSBC and Standard Chartered.
2010 Estimate 2009 Actual No. of Analysts
HSBC Net income 13,912 5,834 15
Pretax 20,453 7,079 21 Profit
Revenue 69,274 66,181 19
Bad loan Provisions 14,063 26,488 2
Standard Chartered Net income 4,220 3,380 17
Pretax Profit 6,145 5,151 25
Revenue 15,894 15,184 23