Tag Archives: HSBC

Stocks in Focus: HSBC

This week I am looking at HSBC, one of the world’s largest banks, which delivered promising half year results at the end of last month.

The results showed a pre-tax profit for the first half of 2017 of $10.2billion, an increase of over 5% on the same period last year.  The better numbers were thanks to a boost from rising US interest rates, which generally enables it to make wider margins on loans, and an improved trading environment. In particular, the bank continues to see growth opportunities in Asia, where it makes three quarters of its profits.

Additionally, management announced a new $2billion share buyback, which will raise the amount of total stock that they have pledged to repurchase in the last year to $5.5billion. On the subject of management, investors are keeping a keen eye on the bank’s succession planning. Mark Tucker has recently been appointed as the new chairman and one of his first priorities will be to find a replacement for existing Chief Executive Stuart Gulliver, who is due to step down next year.

The shares have performed well of late and are currently trading close to a four year high following a rise of more than 50% over the last year. This leaves the shares trading on a relatively high valuation of 1.4x book value at a time of management uncertainty. Set against this, there are still plenty of positives. The bank is financially strong, offers an attractive dividend yield of over 5%, and is well placed to benefit from further normalisation of US interest rates.

Stocks in Focus: HSBC

HSBC’s Chairman, Douglas Flint, announced last week that the bank is considering moving its headquarters from the UK. This is not entirely surprising given the environment of increasing regulation, fines and bank levy taxes facing banks headquartered in the UK.  Furthermore, a move back to Hong Kong (from where it moved its domicile at the request of the Bank of England when it bought Midland Bank in 1992) could make operational sense given that approximately 78% of the bank’s profits come from Asia.

Thus far, the shares have risen strongly since the announcement.  Indeed, common consensus is that a move would cost approximately £1bn but would save the company roughly £930m each year, much of which would be as a result of a reduced UK bank levy.

So could the bank follow through with its threat? In reality, there are a number of reasons why it would not. First, it is an open question whether the UK regulator would allow the bank to move back to Hong Kong (or anywhere else).  Second, the shareholder base, which is predominantly from the US and UK, would likely baulk at owning a Chinese-listed bank.

In any case, it is no coincidence that HSBC have made this announcement at such a politically important time. The levy on bank balance sheets cost HSBC £750m last year and is set to increase to £1.2bn under George Osbourne’s plans or £1.5bn under Labour. It is unlikely that any government would backtrack on these policies, but HSBC’s warning shot may add caution to any government planning further increases.

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Stocks in focus: HSBC

The UK banks recently announced their interim results, which provide an update on the businesses for the first half of the year. This week I am looking at HSBC, a bank which has undergone considerable restructuring and refocusing over the last three years. Its reported profits are down 12% vs. the first half of 2013 but when adjusted for significant items the underlying profits have increased by 3%.

All banks have been operating in uncomfortable market conditions of low interest rates, reduced financial market volumes and waves of regulations. The bulk of HSBC’s targeted restructuring has been achieved and has resulted in decreased revenues as it has sought to de-risk its operations. This de-risking over an extended period has had a big impact on its profit margins but also has led to a significant reduction in loan impairment charges (from bad debt) which have come down from $3bn in the first half of 2013 to $1.8bn over the same period in 2014.

Douglas Flint, the HSBC Chairman, used the announcement to warn against banking reforms.  He suggested that over-regulation is leading to a zero-risk environment and an increase in costs required to comply with multiple regulatory requirements in multiple jurisdictions – a key challenge for an international bank such as HSBC.  Offsetting this, HSBC stands to benefit from any rate increases in the UK or US and has attractive exposure to faster growing developing markets.

http://www.nwbrown.co.uk/library/Stocks-in-focus-HSBC