HSBC’s Decent Q1 Performance Not Enough To Impress Investors

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HSBC (NYSE:HSBC) reported a better-than-expected performance for the first quarter of the year earlier this week on the back of strong trading revenues. [1] Although the low interest rate environment significantly hurt interest income for the global banking giant, the notable improvement in equities and foreign exchange trading revenues mitigated the impact on the top line. The results also benefited from improving economic conditions worldwide, which allowed the bank to set aside just $570 million in loan provisions for the quarter – the lowest since at least 2005. Moreover, the results were largely unencumbered by huge one-time legal charges, with the bank increasing legal reserves by $139 million and adding another $137 million to PPI and interest rate product redressals. In fact, adjusting the bank’s results for Q1 2015 and Q1 2014 for one-time expenses and forex movements shows that each of the bank’s operating divisions except for the notably small private banking operations saw a year-on-year improvement in pre-tax profit.

However, the stock declined by 3% after the results were announced. The biggest source of concern is the growing possibility of the bank moving its headquarters out of U.K. to avoid the steep bank levy charged by the British government. While HSBC is expected to make a decision by the end of this year, such a step could force the bank to incur several billion dollars in costs as a part of the complicated and long-drawn relocation process. Also, the bank has been forced to significantly expand its compliance team to meet stricter regulatory requirements – something that is expected to increase operating expenses in the long run.

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We maintain a $53 price estimate for HSBC’s shares, which is roughly 10% ahead of the current market price.

See our complete analysis of HSBC here

Lukewarm Retail Banking Performance

HSBC’s retail banking and wealth management (RBWM) business witnessed sizable headwinds on two fronts over the first quarter of the year: the negative impact of a strengthening U.S. dollar, and the growing pressure on net interest margins from the low interest rates prevalent worldwide. Both factors depressed the total revenue figure for RBWM, which fell to $5.8 billion for Q1 2015 – 7% lower than the figure for the previous quarter and a 2% reduction sequentially. However, adjusting revenues for currency translations shows that things were not that bad, as the revenues actually improved 3% year-on-year as well as quarter-on-quarter. Almost all of this improvement comes from a sharp improvement in revenues from HSBC’s wealth products which include investment distribution, life insurance distribution, and asset management. With the bank not incurring any major accounting or legal charge for the period, the adjusted pre-tax income figure for the period was essentially the same as the figure for the year-ago period.

The retail banking operations saw the most improvement in the Asia-Pacific and MENA (Middle East and North Africa) regions. The bank’s operations in Hong Kong in particular reported handsome sequential gains with pre-tax income jumping from $872 million in Q4 2014 to $1.05 billion in Q1 2015. These gains stem from the notable increase in loans handed out by HSBC in  each of these regions.

Investment Banking Operations Boost Results

HSBC reports the performance of its investment banking operations along with its treasury and securities services operations as a part of its Global Banking & Markets business division. This division reported revenues of $5.2 billion in Q1 2015 – slightly above the figure for Q1 2014, and a good 60% higher than the $3.3 billion figure for the previous quarter. Adjusting the figures for currency translations shows how well the division performed operationally, as adjusted revenues of $5.15 billion for the quarter indicate a 8% improvement year-on-year.

The improvement can be traced to an exceptionally strong performance by the foreign exchange trading desk, which churned out $942 million in Q1 2015 – 24% higher than the figure for Q1 2014 and 53% more than that for Q4 2014. The improved valuation of securities also helped revenues from balance sheet management increase to $927 million from $751 million in previous quarter and $714 million a year ago. This helped the overall quarterly performance of the bank’s treasury services unit.

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Notes:
  1. 1Q 2015 Earnings Release, HSBC Investor News, May 5 2015 []