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HSBC Holdings plc’s (HSBC - Analyst Report) earnings per share for the first half of 2014 came in at 50 cents, 7% below the prior-year figure of 54 cents. Net profit was $10.3 billion, 9% below the year-ago comparable period.

Adverse results were primarily due to a fall in revenues, which reflected weaker growth in Retail Banking and Wealth Management, and Global Banking and Markets segments. This was partially offset by a fall in operating expenses and lower loan impairment charges. Notably, while profitability ratios declined, capital ratios showed improvement.

Performance in Detail

The underlying profit before tax was $12.6 billion, declining 4% from the prior-year period. The fall largely reflected lower revenues, partially offset by a decrease in operating expenses and lower loan impairment charges.

Total revenue (on an underlying basis) was $31.4 billion, down 4% from $32.7 billion in the year-ago period due to non-occurrence or fall in significant items. Excluding these, revenue remained almost stable.

Underlying total operating expenses climbed 2% year over year to $18.2 billion, primarily attributable to higher employee compensation and benefits-related expenses. Notably, excluding these significant items, operating expenses increased 4% from the year-ago quarter due to increased investment in Global Standards, Risk and Compliance.

Underlying cost efficiency ratio increased to 58.2% from 54.9% in the prior-year period. A rise in efficiency ratio indicates fall in profitability.

Performance by Business Line (on underlying basis)

Retail Banking and Wealth Management: The segment reported $3.0 billion in pre-tax profit, down 7% from the prior-year period. The decline was due to lower revenues partially offset by a fall in loan impairment charges.

Commercial Banking: The segment reported pre-tax profit of $4.8 billion, up 15% from the comparable last-year period. The rise was mainly driven by higher revenues and a decline in loan impairment charges, partly offset by higher operating expenses.


Global Banking and Markets: Pre-tax profit for the segment was $5.0 billion, decreasing 12% year over year. The segment’s results suffered due to lower revenues, partly offset by decline in loan impairment charges and operating expenses.

Global Private Banking: Pre-tax income for the segment was $364 million, up significantly from $108 million recorded in the year-ago period. The improvement was attributable to growth in revenues and lower expenses.

Other: The segment recorded a pre-tax loss of $873 million against a pre-tax income of $840 million in the year-ago period.

Profitability and Capital Ratios

Profitability deteriorated in the reported quarter, while capital ratios witnessed an improvement. Annualized return on equity declined to 10.7% from 12.0% as of Jun 30, 2013. Also, pre-tax return on risk-weighted assets (annualized) inched down to 2.1% from 2.6% in the prior-year period. 


The company’s common equity Tier 1 ratio as of Jun 30, 2014 increased to 11.3% from 10.1% as of Jun 30, 2013.

Our Viewpoint

By disposing unprofitable/non-core operations, HSBC is striving to boost its profitability amid the challenging market environment.. 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).

Performance of Other Foreign Banks

UBS AG (UBS - Analyst Report) reported second-quarter 2014 net income attributable to shareholders of CHF 792 million ($890.8 million), comparing favorably with the prior-year quarter earnings of CHF 690 million ($731.8 million). Results were attributable to prudent expense management.

Impacted by a disappointing top-line performance, Deutsche Bank AG (DB - Analyst Report) reported net income of €238 million ($326.4 million) in the second quarter of 2014, down from €335 million ($437.4 million) in the prior-year quarter. However, decreased expenses, lower provision for credit losses and a strong capital position were the positives.

Barclays PLC (BCS - Analyst Report) reported adjusted net income of £1,760 million ($2,911 million) for first half of 2014, down 14% from the prior-year period. The fall was primarily due to slump in investment banking income as the company continued to face tough trading conditions leading to lower client activities.

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