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Strong Q3 Earnings for HSBC

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HSBC Holdings plc’s earnings per share for third-quarter 2013 came in at 16 cents, which was above the prior-year quarter figure of 13 cents. Net profit came in at $3.5 billion, rising 23% from the comparable last-year quarter.

Strong results were driven by top-line improvement and reduced operating expenses. Moreover, capital and profitability ratios considerably improved. On the flip side, poor performance across all businesses except for Retail Banking and Wealth Management acted as a headwind.

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 54 of its non-core/unprofitable operations across the globe. Moreover, HSBC generated cost savings of $0.4 billion in the third quarter, leading to annualized total savings of $4.5 billion.

Behind the Headlines

The underlying profit before tax was $5.1 billion in the reported quarter, up 10% from the prior-year quarter. The rise primarily came on the back of decrease in loan impairment charges as well as expenses.

Total revenue (on an underlying basis) was $15.6 billion, almost stable from $15.7 billion in the previous-year quarter.

Total operating income increased 4% from the year-ago quarter to $19.2 billion. The rise was largely driven by rise in dividend income and other operating income, partially offset by fall in net interest income, fee income and net trading income.

Underlying total operating expenses declined 4% year over year to $9.6 billion. The fall was mainly due to absence of the provision related to the U.S. anti-money laundering, BSA and OFAC investigations, partially offset by rise in charges related to the U.K. customer redress programs as well as restructuring and related costs.

The underlying cost efficiency ratio decreased to 61.4% from 63.5% in the comparable quarter last year. A fall in efficiency ratio indicates rise in profitability.

Performance by Business Line (on underlying basis)

Retail Banking and Wealth Management: The segment reported $1.6 billion in pre-tax profit, up 28% from $1.2 billion in the prior-year quarter. The rise was driven by lower loan impairment charges and a fall in expenses.

Commercial Banking: The segment reported pre-tax profit of $1.9 billion, down 6% from the comparable quarter last year. The decline was mainly due to rise in operating expenses and loan impairment charges, partially offset lower revenues.

Global Banking and Markets: Pre-tax profit for the segment was $1.8 billion, decreasing 14% year over year. The segment’s results suffered due to lower revenues and rise in loan impairment charges and operating expenses.

Global Private Banking: Pre-tax loss for the segment was $16 million, compared with a pre-tax income of $251 million in the prior-year period. The decline resulted from decreased revenues and higher expenses, partly offset by lower loan impairment charges.

Other: The segment recorded a pre-tax loss of $773 million against $2.8 billion in the prior-year period.

Profitability and Capital Ratios

Profitability ratios improved in reported quarter. Annualized return on equity rose to 7.2% from 5.8% as of Sep 30, 2013.  Moreover, pre-tax return on risk-weighted assets (annualized) grew to 1.6% from 1.2% in the prior-year quarter.  

HSBC continued to generate capital from its retained profits. The company’s core Tier 1 ratio as of Sep 30, 2013 improved to 13.3% from 12.7% as of Jun 30, 2013. Total capital ratio also rose from 16.6% as of Jun 30, 2013 to 17.4% as of Sep 30, 2013.

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 #3 (Hold). Some better-performing foreign banks that are worth considering include Deutsche Bank AG (DB - Free Report) , Westpac Banking Corporation (WBK - Free Report) and National Australia Bank Limited (NABZY - Free Report) . All these stocks hold a Zacks Rank #1 (Strong Buy).

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