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HSBC Holdings plc (HSBC - Free Report) reported dismal second-quarter 2016 results. The company recorded a net income of $2.9 billion, down 43% from the year-ago quarter. Challenging operating backdrop was the primary reason for the decline in profit.
Notwithstanding the disappointing results, HSBC rose over 4% in pre-market trading on NYSE. This we believe perhaps reflects the investors’ bullish stance, given the continued success of its cost savings strategy.
Additionally, the company’s decision to initiate $2.5 billion share repurchases (following the completion of sale of Brazilian unit) and keep dividend payout intact for “the foreseeable future” also cheered the investors. Possibly, the price reaction during the full trading session will provide a better picture about how investors accepted the results.
Lower revenues reflecting tough operating environment, a rise in legal charges and higher loan impairment charges adversely impacted the results. Though the quarter witnessed a steady progress in HSBC’s cost-saving initiatives, it was not sufficient to support the bottom line.
Lower Costs Offset by Revenue Slump
Total revenue of $14 billion declined 5% year over year. The decrease was mainly due to lower net interest income and net fee income, partially offset by a rise in net trading revenue.
Loan impairment charges and other credit risk provisions surged 49% from the year-ago quarter to $1.2 billion, mainly owing to the stressed oil & gas, and metals & mining sectors.
Total operating expenses fell 7% year over year to $8.1 billion. The decrease was largely driven by success of the company’s restructuring plan and cost-saving initiatives. Notably, the decline was despite continued investments in regulatory programs and compliance as well as inflationary impacts.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $1.2 billion in pre-tax profit, down 29% year over year. The fall was mainly led by lower revenues and a rise in loan impairment charges, partially offset by a decline in operating expenses.
Commercial Banking: The segment reported pre-tax profit of $2.3 billion, inching up 1% from the year-ago quarter. The marginal rise reflected higher revenues and a decrease in operating expenses, partly offset by higher loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment improved 10% from the year-ago quarter to $1.9 billion. The increase was largely driven by a decrease in operating expenses, partly offset by lower revenues and a significant rise in loan impairment charges.
Global Private Banking: Pre-tax loss for the segment was $667 million, as against pre-tax income of $115 million recorded a year ago. The drastic deterioration was largely due to a rise in loan impairment charges, lower revenues and higher costs.
Other: The segment recorded a pre-tax loss of $1.1 billion as against a pre-tax income of $760 million recorded in the year-ago period. The deterioration was owing to a rise in operating expenses and lower higher top line.
Improved Capital Ratios
Common equity Tier 1 ratio (transitional) as of Jun 30, 2016 was 12.1%, up from 11.9% as of Dec 31, 2015. Further, leverage ratio was 5.1%, up from 5.0% as of Dec 31, 2015.
Notably, given the present “uncertain economic and geo-political environment” as well as persistent low rate scenario, HSBC removed its target to cross 10% return on equity (ROE) by 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 decision to initiate share buyback will 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. Moreover, the Brexit fallout adds to the woes.
HSBC currently carries a Zacks Rank #5 (Strong Sell).
Performance of Other Foreign Banks
Barclays PLC’s (BCS - Free Report) second-quarter 2016 net income from continuing operations was £803 million ($1.15 billion), down 34% from the year-ago quarter. Also, pre-tax earnings of £1.27 billion ($1.82 billion) declined 18% year over year, given a tough industry backdrop and sale of several non-core operations.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially offset by a 15% increase in net trading income
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second quarter of 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year.
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HSBC Q2 Earnings Plunge; Share Buyback Cheers Investors
HSBC Holdings plc (HSBC - Free Report) reported dismal second-quarter 2016 results. The company recorded a net income of $2.9 billion, down 43% from the year-ago quarter. Challenging operating backdrop was the primary reason for the decline in profit.
Notwithstanding the disappointing results, HSBC rose over 4% in pre-market trading on NYSE. This we believe perhaps reflects the investors’ bullish stance, given the continued success of its cost savings strategy.
Additionally, the company’s decision to initiate $2.5 billion share repurchases (following the completion of sale of Brazilian unit) and keep dividend payout intact for “the foreseeable future” also cheered the investors. Possibly, the price reaction during the full trading session will provide a better picture about how investors accepted the results.
Lower revenues reflecting tough operating environment, a rise in legal charges and higher loan impairment charges adversely impacted the results. Though the quarter witnessed a steady progress in HSBC’s cost-saving initiatives, it was not sufficient to support the bottom line.
Lower Costs Offset by Revenue Slump
Total revenue of $14 billion declined 5% year over year. The decrease was mainly due to lower net interest income and net fee income, partially offset by a rise in net trading revenue.
Loan impairment charges and other credit risk provisions surged 49% from the year-ago quarter to $1.2 billion, mainly owing to the stressed oil & gas, and metals & mining sectors.
Total operating expenses fell 7% year over year to $8.1 billion. The decrease was largely driven by success of the company’s restructuring plan and cost-saving initiatives. Notably, the decline was despite continued investments in regulatory programs and compliance as well as inflationary impacts.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $1.2 billion in pre-tax profit, down 29% year over year. The fall was mainly led by lower revenues and a rise in loan impairment charges, partially offset by a decline in operating expenses.
Commercial Banking: The segment reported pre-tax profit of $2.3 billion, inching up 1% from the year-ago quarter. The marginal rise reflected higher revenues and a decrease in operating expenses, partly offset by higher loan impairment charges.
Global Banking and Markets: Pre-tax profit for the segment improved 10% from the year-ago quarter to $1.9 billion. The increase was largely driven by a decrease in operating expenses, partly offset by lower revenues and a significant rise in loan impairment charges.
Global Private Banking: Pre-tax loss for the segment was $667 million, as against pre-tax income of $115 million recorded a year ago. The drastic deterioration was largely due to a rise in loan impairment charges, lower revenues and higher costs.
Other: The segment recorded a pre-tax loss of $1.1 billion as against a pre-tax income of $760 million recorded in the year-ago period. The deterioration was owing to a rise in operating expenses and lower higher top line.
Improved Capital Ratios
Common equity Tier 1 ratio (transitional) as of Jun 30, 2016 was 12.1%, up from 11.9% as of Dec 31, 2015. Further, leverage ratio was 5.1%, up from 5.0% as of Dec 31, 2015.
Notably, given the present “uncertain economic and geo-political environment” as well as persistent low rate scenario, HSBC removed its target to cross 10% return on equity (ROE) by 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 decision to initiate share buyback will 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. Moreover, the Brexit fallout adds to the woes.
HSBC currently carries a Zacks Rank #5 (Strong Sell).
Performance of Other Foreign Banks
Barclays PLC’s (BCS - Free Report) second-quarter 2016 net income from continuing operations was £803 million ($1.15 billion), down 34% from the year-ago quarter. Also, pre-tax earnings of £1.27 billion ($1.82 billion) declined 18% year over year, given a tough industry backdrop and sale of several non-core operations.
UBS Group AG (UBS - Free Report) reported second-quarter 2016 net profit attributable to shareholders of CHF 1.03 billion ($1.06 million), down 14% year over year. The results were impacted by a 22% year-over-year decrease in net interest income and a 7% drop in net fee and commission income, partially offset by a 15% increase in net trading income
Deutsche Bank AG (DB - Free Report) reported net income of €20 million ($22.6 million) in the second quarter of 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), down 66.8% year over year.
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