Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

With a disappointing buyback in the cards, shares of HSBC Holdings Plc may struggle to continue their ascent. It's time for the London-headquartered bank to deliver on revenue growth and profitability.

Stock in the lender that makes almost two-thirds of its money from Asia has risen 60 percent in London over the past 12 months. Like rival Standard Chartered Plc, a big focus on a part of the world that contains several emerging markets has made the slump in the pound since Brexit less painful.

Nice Hedge
HSBC and StanChart, which both make the bulk of their money outside the U.K., have outperformed rivals since the Brexit vote
Source: Bloomberg

HSBC managed to increase revenue faster than costs in 2016, it said in results announced Tuesday. Full-year adjusted pretax profit was $19.3 billion, while a lower reported profit before tax of $7.1 billion, down 62 percent on 2015, was a result of several significant exceptional items, including a $3.2 billion impairment of goodwill in Europe and the impact of HSBC's sale of its operations in Brazil. Adjusted revenue of $50.2 billion was broadly unchanged. For the three months ended Dec. 31, a decline in interest income and fees resulted in a wider pretax loss of $3.4 billion.

Sound Footing
HSBC's core equity Tier 1 ratio ended 2016 above the bank's 12 to 13 percent target range
Source: Company filings

The lender is in good financial health, with its core equity Tier 1 ratio coming in at 13.6 percent, compared with 13.9 percent in the three months ended Sept. 30, well above HSBC's 12 to 13 percent target range. The fixed income, currencies and commodities boom benefiting Wall Street bolstered HSBC's investment-banking operations, too. But more uplifting for investors will be the bank's plans for another buyback, particularly after it shifted from a progressive to a sustained dividend policy last year, effectively killing one of the star attractions of its stock.

HSBC said it would return a further $1 billion to shareholders via a stock repurchase that's expected to complete in the first half. That takes announced buybacks since the second half of 2016 to $3.5 billion.

With capital robust, it's time for HSBC to start taking some risks again. Trade finance could take a hit if U.S. President Donald Trump makes good on his pre-election promises regarding tariffs and China, but with a loan-to-deposit ratio of less than 70 percent, HSBC is geared to benefit from rising rates. Loans and advances to customers for the year totaled $861.5 billion, down from $924.5 billion in 2015.

Not Many Happy Returns
HSBC's return on equity slumped last year
Source: Company filings

Last August, the bank abandoned its target of bettering a 10 percent return on equity by the end of 2017, citing low borrowing costs and political uncertainties. It may be time to bring some of those goals and time frames back. UBS Group AG for one was looking for a buyback of as much as $3 billion, funded by the repatriation of capital from the U.S., while Citigroup Inc. had expected a $2.5 billion repurchase plan might become an annual undertaking.

HSBC can, and should, do more. Investors have shown a lot of love for the lender, but they need a reason to keep piling in.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net