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HSBC PLC profits trashed by now customary “exceptional” items

Monday, November 7, 2016 2:45
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Depending on how you looked at them, third quarter results from HSBC Holdings PLC (LON:HSBA) were either excellent, or abysmal.

The market pushed the shares 4.4% higher to 621p, so it was obviously happy to focus on the company’s preferred figure of adjusted pre-tax profits, which rose 7% in the third quarter to US$5.59bn from US$5.24bn the year before.

The adjusted figure ignores “one-off” or exceptional items, but for the banks the exceptional has become the norm, rather than the exception.

Factoring in those one-off items, the third quarter pre-tax profit slumped 86% to US$843mln from US$6.1bn the year before.

Among the exceptional items were a US$1.1bn paper-based adjustment to the cost of buying back its own debt, should it want to, on the open market; a US$1.7bn loss on the sale of its Brazilian business; US$1bn of costs to achieve sustainable costs savings, also known as making thousands of people redundant; and US$456mln of “customer redress”, also known as compensating customers for dubious practices.

The bank also swallowed a US$658 loss from the strengthening US dollar.

Third quarter reported revenue fell to US$9.5bn from US$15.1bn the year before.

“Our third-quarter performance reflected the strength of our network and the deepening impact of our strategic actions,” claimed chief executive Stuart Gulliver.

“Reported profits were down, but adjusted profits were higher than last year’s third quarter in all four global businesses and four out of five regions,” he added.

“Following a change in the regulatory treatment of our investment in BoCom, our common equity tier 1 capital ratio increased to 13.9%. This is another action forming part of our ongoing capital management of the group that reinforces our ability to support the dividend, to invest in the business and, over the medium term, to contemplate share buy-backs, as appropriate. It also provides us with a significant capacity to manage the continuing uncertain regulatory environment,” Gulliver said.

Gary Greenwood at Shore Capital Markets said the one percentage point (100 basis points) boost to the tier 1 capital ratio from its strategic investment in China’s BoCom was unexpected, and had resulted in a significant reduction in risk-weighted assets.

“This implies the group has c$8.1bn of surplus capital on its balance sheet at the end of the period relative to a benchmark core tier 1 ratio of 13%, being the upper end of management’s 12-13% target range,” Greenwood calculated.

“The group has now completed 59% of its US$2.5bn share buy-back programme with the remainder expected to be carried out over the remainder of the year, subject to market conditions. We expect further share buy-backs will follow in 2017 and beyond, with our model including an ongoing US$2.5bn per annum. Management has again committed to maintaining the dividend at the prior year level,” Greenwood noted.

“Costs reduced by 4% year-on-year, resulting in a second consecutive quarter of positive cost-to-income jaws following a prolonged period in which jaws were negative,” Greenwood continued.

The jaws ratio tracks the relative growth rates of an entity’s income growth rate and its expenses growth rate. 

“We note that the group has chosen to take US$1.0bn of restructuring charges below the line (up $0.8bn year-on-year), thereby flattering the underlying position. Impairments increased by 30% year-on-year but were lower than in Q2 and remain at relatively benign levels,” Greenwood declared.

Story by ProactiveInvestors


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