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HSBC Swings to Loss in Q3 Despite Improvement in Revenues
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HSBC Holdings plc (HSBC - Free Report) reported dismal third-quarter 2016 results. The company recorded a net loss attributable to shareholders of $204 million, compared with net income attributable to shareholders of $5.2 billion in the year-ago quarter. Divestiture of its Brazilian operation and tough operating backdrop were the primary reasons for the loss.
Notwithstanding the disappointing results, HSBC rose over 3% in pre-market trading on the NYSE. This, we believe, perhaps reflects the investors’ bullish stance, given the continued success of its cost-savings strategy and a marginal rise in top line.
Despite witnessing steady success in its cost-saving initiatives, HSBC’s results were hampered by streamlining operations. Also, higher loan impairment charges acted as a headwind. However, revenue improved reflecting rebound in trading, but that was not enough to support the bottom line.
Higher Revenues & Lower Costs Supported Results
Adjusted total revenue of $12.8 billion rose 2% year over year. Improvement in Global Banking and Markets, and Retail Banking and Wealth Management segment revenues largely boosted revenues.
Adjusted loan impairment charges and other credit risk provisions surged 30% from the year-ago quarter to $566 million, reflecting the bank’s focus on growing unsecured lending balances primarily in Mexico.
Adjusted total operating expenses declined 4% from the prior-year quarter to $7.2 billion. The decrease was mainly driven by success of the company’s restructuring plan and cost-saving initiatives. Notably, the decline was despite the inflationary impacts.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $266 million in pre-tax profit, plunging 77% year over year. The fall was mainly led by lower revenues, partially offset by a decline in operating expenses and loan impairment charges.
Commercial Banking: The segment reported pre-tax profit of $1.5 billion, down 31% from the year-ago quarter. Decline was largely due to fall in revenues, partly offset by a decrease in operating expenses and lower loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment decreased 8% from the year-ago quarter to $2 billion. The fall was owing to lower revenues, partly offset by decrease in operating expenses and loan impairment charges.
Global Private Banking: Pre-tax profit for the segment was $151 million, soaring 86% from the year-ago quarter. The drastic improvement was largely driven by lower cost and benefit from provisions, partially offset by a decrease in top line.
Other: The segment recorded a pre-tax loss of $3.1 billion as against a pre-tax income of $489 million recorded in the year-ago period. The deterioration was owing to a rise in operating expenses and negative revenue.
Improved Capital Ratios
Common equity Tier 1 ratio (transitional) as of Sep 30, 2016 was 13.9%, up from 11.9% as of Dec 31, 2015. Further, leverage ratio was 5.4%, up from 5.0% as of Dec 31, 2015.
Share Repurchase Update
HSBC completed 59% of $2.5 billion equity buy back as of Oct 31, 2016. Management expects to complete the share buyback authorization by the end of 2016 or early 2017.
Our Viewpoint
By disposing unprofitable/non-core operations, HSBC has been successful in its strategy to enhance efficiency, as operating costs continue to decline. Further, the bank is poised to benefit from its extensive global network, strong capital position and a solid asset growth. Also, the company’s share buyback plan will help restore investors’ confidence in the stock, to some extent.
However, a dismal European economy, weak loan demand, litigation expenses and stringent regulations will continue to limit HSBC’s growth in the near term. Further, slowdown in Chinese markets as well as significant decline in commodity and oil prices remain matters of concern.
Barclays PLC’s (BCS - Free Report) third-quarter 2016 net income from continuing operations was £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) grew 35% year over year, reflecting rebound in bond trading income.
UBS Group AG (UBS - Free Report) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter. While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management.
Deutsche Bank AG (DB - Free Report) reported net income of €278 million ($310.2 million) in third-quarter 2016, as against a loss of €6 billion ($6.70 billion) in the prior-year period. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.
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HSBC Swings to Loss in Q3 Despite Improvement in Revenues
HSBC Holdings plc (HSBC - Free Report) reported dismal third-quarter 2016 results. The company recorded a net loss attributable to shareholders of $204 million, compared with net income attributable to shareholders of $5.2 billion in the year-ago quarter. Divestiture of its Brazilian operation and tough operating backdrop were the primary reasons for the loss.
Notwithstanding the disappointing results, HSBC rose over 3% in pre-market trading on the NYSE. This, we believe, perhaps reflects the investors’ bullish stance, given the continued success of its cost-savings strategy and a marginal rise in top line.
Despite witnessing steady success in its cost-saving initiatives, HSBC’s results were hampered by streamlining operations. Also, higher loan impairment charges acted as a headwind. However, revenue improved reflecting rebound in trading, but that was not enough to support the bottom line.
Higher Revenues & Lower Costs Supported Results
Adjusted total revenue of $12.8 billion rose 2% year over year. Improvement in Global Banking and Markets, and Retail Banking and Wealth Management segment revenues largely boosted revenues.
Adjusted loan impairment charges and other credit risk provisions surged 30% from the year-ago quarter to $566 million, reflecting the bank’s focus on growing unsecured lending balances primarily in Mexico.
Adjusted total operating expenses declined 4% from the prior-year quarter to $7.2 billion. The decrease was mainly driven by success of the company’s restructuring plan and cost-saving initiatives. Notably, the decline was despite the inflationary impacts.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $266 million in pre-tax profit, plunging 77% year over year. The fall was mainly led by lower revenues, partially offset by a decline in operating expenses and loan impairment charges.
Commercial Banking: The segment reported pre-tax profit of $1.5 billion, down 31% from the year-ago quarter. Decline was largely due to fall in revenues, partly offset by a decrease in operating expenses and lower loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment decreased 8% from the year-ago quarter to $2 billion. The fall was owing to lower revenues, partly offset by decrease in operating expenses and loan impairment charges.
Global Private Banking: Pre-tax profit for the segment was $151 million, soaring 86% from the year-ago quarter. The drastic improvement was largely driven by lower cost and benefit from provisions, partially offset by a decrease in top line.
Other: The segment recorded a pre-tax loss of $3.1 billion as against a pre-tax income of $489 million recorded in the year-ago period. The deterioration was owing to a rise in operating expenses and negative revenue.
Improved Capital Ratios
Common equity Tier 1 ratio (transitional) as of Sep 30, 2016 was 13.9%, up from 11.9% as of Dec 31, 2015. Further, leverage ratio was 5.4%, up from 5.0% as of Dec 31, 2015.
Share Repurchase Update
HSBC completed 59% of $2.5 billion equity buy back as of Oct 31, 2016. Management expects to complete the share buyback authorization by the end of 2016 or early 2017.
Our Viewpoint
By disposing unprofitable/non-core operations, HSBC has been successful in its strategy to enhance efficiency, as operating costs continue to decline. Further, the bank is poised to benefit from its extensive global network, strong capital position and a solid asset growth. Also, the company’s share buyback plan will help restore investors’ confidence in the stock, to some extent.
However, a dismal European economy, weak loan demand, litigation expenses and stringent regulations will continue to limit HSBC’s growth in the near term. Further, slowdown in Chinese markets as well as significant decline in commodity and oil prices remain matters of concern.
HSBC HOLDINGS Price, Consensus and EPS Surprise
HSBC HOLDINGS Price, Consensus and EPS Surprise | HSBC HOLDINGS Quote
HSBC currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Foreign Banks
Barclays PLC’s (BCS - Free Report) third-quarter 2016 net income from continuing operations was £509 million ($668.2 million), up 5% from the year-ago quarter. Also, pre-tax earnings of £837 million ($1.10 billion) grew 35% year over year, reflecting rebound in bond trading income.
UBS Group AG (UBS - Free Report) reported third-quarter 2016 pre-tax operating profit of CHF 1.30 billion ($1.33 billion) on an adjusted basis, up 32.7% from the prior-year quarter. While results reflected increase in net trading income, it witnessed a decline in net interest income and net fee and commission income. Notably, the quarter benefited from the company’s continued focus on expense management.
Deutsche Bank AG (DB - Free Report) reported net income of €278 million ($310.2 million) in third-quarter 2016, as against a loss of €6 billion ($6.70 billion) in the prior-year period. Results largely benefited from strength in sales and trading (debt) revenues and the company’s continued cost-control moves. However, on the down side, the quarter recorded higher provisions.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>