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HSBC Holdings plc’s (HSBC - Analyst Report) earnings per share for full-year 2013 came in at 84 cents, which was 14% higher than the prior-year figure of 74 cents. Net profit came in at $15.6 billion, rising 16% from the past year.

Impressive results were driven by top-line improvement and reduced operating expenses. Moreover, capital and profitability ratios considerably improved.

Performance in Detail

The underlying profit before tax was $21.6 billion, up 41% from the prior year. The rise primarily came on the back of decrease in loan impairment charges as well as lower fines and penalties and customer redress costs.

Total revenue (on an underlying basis) was $63.3 billion, increasing 3% from $61.6 billion in 2012. The rise was primarily driven by impressive growth in Global Banking & Markets and Commercial Banking segments.

Total operating income decreased 5% year over year to $78.3 billion. The fall was largely due to decline in net earned insurance premiums, net interest income and absence of gains on disposal of certain non-core businesses. These were partially offset by rise in dividend income, net trading income and other operating income.

Underlying total operating expenses declined 6% year over year to $38.2 billion. The fall was primarily due to the non-recurrence of certain charges related to investigations, lower U.K. customer redress charges and decrease in restructuring and related costs.

Further, the underlying cost efficiency ratio decreased to 60.4% from 66.2% in 2012. A fall in efficiency ratio indicates rise in profitability.

Profitability and Capital Ratios

Profitability and capital ratios improved in 2013. Annualized return on equity rose to 9.2% from 8.4% as of Dec 31, 2012.  Also, pre-tax return on risk-weighted assets (annualized) grew to 2.0% from 1.8% in the prior year.  

The company’s core Tier 1 ratio as of Dec 31, 2013 grew to 13.6% from 12.3% as of Dec 31, 2012. The improvement was attributable to ongoing divestiture or closure of non-core/unprofitable businesses.

Moreover, total capital ratio rose from 16.1% as of Dec 31, 2012 to 17.8% as of Dec 31, 2013.

Update on Cost Savings Strategy

HSBC exhibited significant progress in strategically reshaping itself and improving its returns. Since the beginning of 2011, the company announced the divestiture or closure of more than 63 of its non-core/unprofitable operations across the globe.

HSBC generated cost savings of $1.5 billion in 2013, leading to annualized total savings of $4.9 billion. This exceeded the target of $2.5–$3.5 billion that was to be achieved in 2013.

Moreover, HSBC remains well positioned to start with the next phase of strategy implementation in 2014. Though this is a continuation of the earlier plan, the company revised certain targets in 2013 to be achieved by 2016. Notably, the company reaffirmed its return on equity target at 12%–15% and cost-efficiency target to the mid-50s level.

In order to meet the targets and move forward with its plan to grow revenues, HSBC aims to deliver a further $2–$3 billion of sustainable cost savings by streamlining its operations.

Further, HSBC plans to enhance its business and dividends. The company’s capital strategy is aimed at increasing dividends progressively.

Performance of Other Foreign Banks

HDFC Bank Ltd. (HDB - Analyst Report) reported third-quarter fiscal 2014 (ended Dec 31) net profit of INR23.26 billion ($0.38 billion), up 25.1% from the prior-year quarter. The increase in the top line was partially offset by higher operating expenses. Moreover, deposit and loan balances as well as credit quality showed improvement.

Impacted by huge litigation costs, Deutsche Bank AG (DB - Analyst Report) reported net loss of €965 million ($1.3 billion) in the fourth quarter of 2013 as compared with a loss of €2.5 billion ($3.4 million) in the prior-year quarter. Lower revenues and higher provision for credit losses were partially offset by decrease in expenses.

Barclays PLC (BCS - Analyst Report) reported adjusted net income of £3,152 million ($4,927 million) for 2013, down 42% from the prior year. The decrease was mainly due to lower investment banking income and net operating income. However, these were partly offset by almost flat operating expenses.

Our Viewpoint

HSBC is striving to boost its profitability amid the challenging market environment by disposing unprofitable/non-core operations. The company is poised to benefit from its extensive global network, strong capital position, cost containment measures, business re-engineering and solid asset growth.

However, high inflation in key Asian markets, sluggish loan growth, disappointing core operating performance and increased wage inflation will likely limit the company’s growth in the near term.

HSBC currently carries a Zacks Rank #4 (Sell).

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