How Did HSBC Fare In Fiscal 2018?

by Trefis Team
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HSBC (NYSE: HSBC) announced its Q4 and full year results recently. After delivering a strong performance in first three quarters of 2018, the bank’s revenue fell by approximately 8% in Q4 2018. The bank’s total revenue for the year increased by approximately 4.5%, driving its net profit to $12.6 billion, an increase of approximately 30% from 2017. Overall, HSBC had a successful fiscal 2018, with Asia again contributing a substantial portion of the profits, notably in Retail Banking, Wealth Management and Commercial Banking.

Loans and advances to customers increased by approximately 2% in 2018, while the Asia loan portfolio grew at 5.5%, constituting 46% of the bank’s total loan portfolio. The loan growth has not come at the expense of higher loan losses, as loan provisions in 2018 were fairly stable. We currently have a price estimate of $50 per share for HSBC, which is ahead of the current market price. We have summarized the key takeaways in our interactive dashboard on HSBC’s Q4 Earnings Overview, the key parts of which are captured in the charts below. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services company data.

Division Summary

  • Net Interest Income constitutes approximately 55% of HSBC’s total revenue and grew 8.2% for 2018. Revenue from net insurance income, which had been negative in the previous three fiscal years, turned positive to reach $852 million in 2018. HSBC’s Asian division constitutes more than 50% of bank’s revenues. The fundamentals for growth in Asia remain strong, and we expect the Asian business to remain a significant part of the bank’s revenue and drive overall revenue growth in the future years.
  • HSBC’s Investment Banking division recorded revenues of $10.6 billion in fiscal 2018, a decline of 2% from 2017. Investment banking revenues fell approximately 27% in Q4 2018 as economic uncertainty and reduced primary issuance led to subdued client activity and spread compression. 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 an increase of 7% in revenues in 2018. Investment banking revenues and profit margins are expected to shrink in the first half of 2019, as the China-U.S. trade disputes and uncertainty surrounding Brexit will likely continue to negatively impact client activity. However, we expect these revenues to largely remain in the 15-20% range of total revenues going forward.
  • HSBC’s total operating expenses remained stable in 2018, leading to an increase in operating income of approximately 16% from 2017. HSBC reported total operating income of $19.9 billion in 2018, led by the bank’s Asian segment, which contributed approximately 90% of total pre-tax income. However, HSBC’s adjusted “jaws ratio” for 2018, which measures adjusted income versus cost growth, came in at negative 1.2%.
  • HSBC’s total asset base increased for the third consecutive year, reaching approximately $256 billion in 2018. Additionally, the bank’s loans and advances increased approximately 2% in 2018 driven by growth in loans and advances in its Asian division. HSBC has chosen to reduce its presence in North America and Europe over the years and shifted its focus more on its Asian operations. This strategy presents a sizable downside risk in the event of a full-blown trade war. A trade war could trigger losses on a chunk of its retail and commercial loan portfolio in China, while also weighing on overall revenue growth.

Looking Forward

HSBC plans to achieve positive adjusted jaws ratio in 2019, and remains focused on achieving a return on tangible equity of over 11% by 2020, while maintaining a stable dividend. However, escalating tariffs and other trade restrictions, and an economic slowdown in the Eurozone and mainland China are likely to have an adverse impact on the bank’s growth.

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