HSBC (HSBC, Financial), Europe’s largest bank by market value, saw its full-year net income drop by 16% to $13.7 billion. The bank was caught in a controversy after allegations surfaced regarding its Swiss Private Bank helping the rich to evade taxes.
The bank, which had made some progress in the first three quarters, fell back due to the low performance in its fourth quarter. The bank has blamed the U.K. customer redressal and the $2.4 billion in fines and settlements for the poor performance. Let’s dig in to find out how HSBC is slowly entering the red zone after this recent earnings release.
The stock market reacts immediately after the earnings release
On the eve of the results, the shares of the European bank fell by nearly 6%, hitting their lowest level in the past two-and-half-years. Though the bank has been streamlining its business, it has already lost nearly 77 businesses and 50,000 clients since Stuart Gulliver took charge as CEO in 2011.
The share price decline, which was higher than what the analysts had expected, was triggered due to the $2.4 billion in fines and customer compensation costs.Ă‚
Profit shows a deep plunge, ROE targets reset
The bank reported a pre-tax profit of $18.7 million for 2014, down from the $22.6 billion in 2013. The profit was below the average analyst forecast of $21 billion, after it was hit by high costs and attempted manipulation of foreign exchange markets.
Nevertheless, the CEO has mentioned that the bank intends to increase its core capital to 12%-13% for keeping sufficient reserves to meet the regulators’ demands. Presently, the core capital stands at around 10.9%. But, higher capital reserves suggests that HSBC is planning to cut its target for ROE (return on equity) to more than 10% in the coming 3-5 years from 12%-15%, set way back in 2011.
Since ROE measures how well shareholders’ funds is used to turn a profit, this financial measure is a vital tool for estimating the growth in the bottom line of a company. And for HSBC, this figure has fallen to 7.3% in 2014 from 9.2% in 2013, which signifies that the bank has a lot of woes to face going forward.
Management’s tone is firm, but the worst is being predicted
HSBC Chairman Douglas Flint insisted that the bank has cleaned up its past behaviour and stated, “The Swiss allegations remind us of how much there still is to do and how far society’s expectations have changed in terms of banks' responsibilities.”
Irrespective of this statement, the management is taking a cautious stand which has led to HSBC’s lowering of its financial targets, which does not bode well for its investors. But the CEO said – “We need to continue to work on simplifying the firm…”
However, analysts are opining that reducing ROE targets at a time when rivals are building strategies to strengthen it would hurt investor confidence in HSBC.
And it remains a matter of fact that as the Asian markets have begun to slow down, HSBC is currently struggling to manage its money and is trying hard to cut costs considerably in the long run.
Final word
With non-enthusiastic prospects going forward, one needs to wait and watch the bank’s performance in the next quarter and 2016. But for now, the future does look a bit bleak for the company, which now needs to focus more in areas of commercial and investment banking to pull back its profits. As costs are being lowered in the face of tougher regulations and more compliance requirements, returns of the company continue to remain depressed. Let’s stay tuned to find out if HSBC is able to weather the storm and remain the ultimate investment option in the long run.
