Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The dance around where HSBC will base its headquarters is over. Now, the bank's global footprint is causing it pain, and there's a question mark over whether the lender will be able to stick to its dividend plans.

HSBC Drops
The bank's shares have been hit by the turmoil in emerging markets
Source: Bloomberg data

CEO Stuart Gulliver's plan to reinvest assets in Asia may have to take a back seat to defending the dividend as global growth slows.

If HSBC's shield against past crises has been its exposure to a multitude of countries, regions and businesses -- from private banking in Paris to currency trading in Hong Kong -- that shield took a big dent in the fourth quarter.

Profit Pain
Pretax profit fell at almost every business, except global markets
Source: Company reports

The bank on Monday reported a surprise $858 million pretax loss on a truly global mix of problems: $400 million of losses tied to loans to the oil and gas industry, provisions for losses in Latin America and Asia, restructuring costs, tax, and restructuring charges. Adjusted pretax profit fell in every single geographic region and almost every single business line, with the exception of global markets.

Dividend Yield
HSBC's dividend yield has climbed over the past five years
Source: Bloomberg

Despite that, HSBC raised the dividend, and said it will keep a "progressive" dividend policy. But the bank's ability to deliver on that pledge is clearly weakening: In 2014 the bank paid dividends of 50 cents a share on 69 cents of earnings per share; for 2015, it proposes a 51-cent payout on 65 cents of EPS.

Under Cover
Profits are falling but payouts are rising
Source: Company reports

If earnings fall further in 2016, as consensus estimates predict, the bank may have to dip into reserves to maintain its dividend. Shore Capital analysts reckon the payment could be cut to as little as 32 cents this year. HSBC shares now have an above-average dividend yield of 8 percent, in part because investors are expecting a reduction in the payout.

HSBC's managers made clear on Monday that a dividend cut would be a crisis scenario. The last time the bank cut its dividend was in 2009 -- during the financial crisis. The lender says it has nothing on its books comparable to the $160 billion exposure to U.S. subprime debt it had back then.

And HSBC isn't sitting still. The bank is almost halfway towards its target of slashing risk-weighted assets. Operating expenses were flat in the second half, relative to the first half, and the bank is targeting thousands of job cuts. Its capital base is steadily improving: the lender's common equity Tier 1 ratio stood at 11.9 percent at the end of the quarter, above peers including BNP Paribas and Santander.

Gulliver is still sticking with his plan to shift more than $100 billion of assets to the Asia-Pacific region and add 4,000 jobs there -- but at a slower pace than before. That's sensible. He may need to slow down further to focus on the dividend. A cut would be a serious test of investor patience with the longest-serving CEO of a British bank.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

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