Broker verdict: HSBC
Graham Spooner, investment research analyst at The Share Centre
“HSBC reported a mixed set of results this morning, which were dominated by an increase in provisions and higher costs, largely as a result of regulatory demands. Overall the results were slightly below expectations with pre-tax profit for the period down 12%. However, positive performance in its global banking and commercial banking divisions helped offset some of this.
“We continue to suggest income seeking investors ‘buy’ for the longer term and build a holding over time by drip feeding into the stock. HSBC has remained a significant dividend payer and though progress may be slow, we believe the shares could be a better option than other banks. HSBC is viewed as more conservatively managed with a superior balance sheet and deposits.
“The CEO’s three year plan includes a return on equity target of 12-15% which it aims to achieve through cutting significant parts of its US operations, along with other businesses around the world. The business plan also concentrates on organic growth from a few key areas that trade heavily with each other.”
Garry White, analyst, Charles Stanley
“HSBC has posted a weaker-than-expected set of third-quarter numbers as it set aside more money to cover fines and compensation for past misdeeds. However, management are making the right moves to reduce risks and return to profit growth. Neil Woodford, the well-regarded City fund manager, sold all his shares in HSBC in September citing fears that banks face unquantifiable “fine inflation” from regulators.
“Today’s earnings release underscored these fears, as the bank ring-fenced $1.7bn to cover a number of one-off charges. These included almost $380m to cover a settlement with the UK regulator’s probe in the rigging of currency markets. This caused its third-quarter numbers to come in below City expectations. The company stressed that the underlying business was performing well when these provisions were stripped out of its numbers.
“The whole banking sector has been rocked by a series of scandals resulting in large fines and compensation claims. Last week, Royal Bank of Scotland and Barclays set aside £900m between them to cover expected foreign exchange rigging settlements. Other banks such as Citigroup and JPMorgan have also made substantial provisions. Today, HSBC also ring-fenced an additional $701m to deal with an increase in claims for the mis-selling of payment protection insurance.
“Despite the issue with fines, the group has taken substantial action to restructure the business for future growth. It has rebuilt its capital buffers to a level it believes will be required under Basel II regulations, many years before these are to be implemented. This means it can now start to grow its lending from a solid base. HSBC is different from other UK listed banks because of its significant Asian exposure and its relative lack of investment banking exposure. Indeed, the company generates 20% of its revenue in Hong Kong and 17% from the rest of Asia. There have been some concerns about a slowdown in emerging markets, but over the long term its presence in these markets should be an advantage.”
Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers
“Stripping out the regulatory provisions, this is a strong operating quarter for HSBC. Unfortunately, the provisions cannot be ignored and the ongoing costs of PPI and the Forex investigations are also joined by an additional US booking. General cost inflation is another drag on the numbers while the company’s exposure to the emerging markets is occasionally of concern.
“More positively, HSBC continues to benefit from the ongoing strength of its balance sheet and a dividend yield of 4.8%, which is clearly attractive in the present interest rate environment. In addition, the Commercial Banking and Global Banking areas propelled the strong performance, also helped along by the improving impairment position. The upbeat outlook comments are something of a reiteration of the bank’s size, robustness and resilience.
“The share price has outperformed the market over the last six months, although over the last year it is down 6%, as compared to a 3% dip for the wider FTSE 100. The general market view remains tainted by the regulatory provisions, such that the consensus is restrained to a hold, albeit a strong one.”