HSBC dives as both quality and quantity of earnings disappoint

"An increase in its dividend, the extension of a share buyback programme and enhanced cost-cutting targets are not proving enough at HSBC this morning, as the megabank’s shares take a dive, amid disappointment at the quantity and quality of both 2016 earnings and the cautious 2017 outlook," says AJ Bell Investment Director Russ Mould.

“The headline 62% drop in pre-tax profit to $7.1 billion represents a huge miss relative to analysts’ expectations north of $14 billion. Although the decline in ‘adjusted’ profits of 1% to $19.3 billion looks less chilling, a lot has to be excluded to get to this ‘earnings before bad stuff’ number, including:

• A $3.2 billion goodwill write-down at its European private banking arm, which also swallowed $344 million in further regulatory provisions
• Restructuring charges of $3.1 billion
  
• A further $1.6 billion in conduct, litigation and compensation costs (although this did at least come in below the $2.4 billion hit suffered by shareholders in 2015)
• A $1 billion adjustment for the sale of the very profitable Brazilian operation

“And it is the adjustment for the Brazilian disposal highlights the key problem for HSBC – not only is the quality of the bank’s earnings weak, as evidenced by yet another messy set of numbers, littered with unpredictable one-off items, but the quantity is lacking as the lender is still trying to shrink itself back to health.

“Partly due to disposals and currency movements, but also ongoing restructuring and a drive to meet regulatory targets for balance sheet strength, HSBC’s risk-weighted assets, customer deposits and loans to customers all fell year-on-year for the eighth quarter in a row.

Source: Company accounts

“It is this lack of growth that may be really hurting the shares today, especially after such a good run since the summer of 2016, when the shares traded at just over 400p.

“A cagey outlook statement that flags unhelpful currency movements, further costs associated with meeting regulatory balance sheet cushions against loss and the impact of lower interest rates in the UK also fails to stir the blood.

“Given the lack of growth and the opaque numbers, a historic price to net asset value multiple of 1.05 times (and 1.2 times price to historic tangible NAV of 1.2 times) looks about right, although the stock is likely to draw support from its dividend yield.

“The increase to $0.51 a share from $0.50 for 2016 will be welcomed by income hunters in particular, leaving the stock on a yield of around 6% and the tenth highest-yielding stock in the FTSE 100 for 2017 (assuming an unchanged payout).”

Source: Company accounts

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