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HSBC Q2 Pre-tax Earnings Up on High Revenues, Costs Escalate

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HSBC Holdings (HSBC - Free Report) recorded second-quarter 2018 pre-tax profit of $6 billion, up 13.2% year over year. The increase was due to rise in revenues.

Further, net income attributable to shareholders of $4.1 billion reflects 5.1% rise from the year-ago quarter.

During pre-market trading, HSBC’s shares slipped 1.23% on the NYSE. This mainly resulted from mounting expenses as the company continues to make investments in business growth programs. Notably, the actual picture will emerge after the full day’s trading session, once investors and analysts go through the core results.

Results were adversely impacted by rise in operating expenses as the company continued to invest in growth programs. On the other hand, higher revenues acted as tailwind. Further, capital ratios remained strong.

Revenues Improve, Expenses Up

Adjusted total revenues of $13.4 billion grew 5.5% year over year. The upswing reflects higher revenues in mostly all global businesses, partially offset by lower revenues in Corporate Centre and Global Private Banking.

Adjusted total operating expenses rose 9.5% from the prior-year quarter to $8.1 billion. This underlines rise in investments for business growth programs.  

Quarterly Performance by Business Lines (adjusted basis)

Retail Banking and Wealth Management: The segment reported $1.7 billion in pre-tax profit, up 6.3% year over year. This upside was driven by higher revenues, partially offset by rise in operating expenses.

Commercial Banking: The segment reported pre-tax profit of $2 billion, increasing 25% from the year-ago quarter. The rise largely stemmed from solid revenues.

Global Banking and Markets: Pre-tax profit for the segment of $2 billion climbed 11.1% from the prior-year quarter. The increase was primarily due to higher revenues, partly offset by elevated operating expenses.

Global Private Banking: Pre-tax profit for the segment was $76 million, down 3.8% from the year-ago quarter. The decline was largely due to escalating expenses.

Corporate Centre: The segment recorded a pre-tax profit of $170 million, down 15.4% from the prior-year quarter. Lower revenues were largely responsible for the dismal segment performance.    

Strong Capital Ratios

Common equity Tier 1 ratio (transitional) as of Jun 30, 2018, was 14.2%, up from 14.5% as of Dec 31, 2017. Further, leverage ratio was 5.4%, down from 5.6% as of Dec 31, 2017.

Our Viewpoint

By disposing unprofitable/non-core operations, HSBC has been successful in its strategy to enhance efficiency. However, weak European and Chinese economies, low loan demand and litigation expenses will continue to curb the bank’s near-term growth. Furthermore, mounting operating expenses are expected to impede its bottom-line performance to some extent.
 

HSBC Holdings plc Price, Consensus and EPS Surprise

HSBC Holdings plc Price, Consensus and EPS Surprise | HSBC Holdings plc Quote

Currently, HSBC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.4 billion ($1.78 billion) in the June-end quarter, up 3.2% year over year. Including non-recurring items, net income came in at R$6.2 billion ($1.72 billion), up 3.3% year over year. Results displayed higher revenues, lower provisions and a solid balance-sheet position. Nevertheless, elevated expenses and reduced managerial financial margin were headwinds.

UBS Group AG (UBS - Free Report) reported second-quarter 2018 net profit attributable to shareholders of CHF 1.28 billion ($1.30 billion), up around 9% from the prior-year quarter. Results marked rise in net fee and commission income (up 2% year over year) and strong capital position. However, the quarter reflected elevated expenses and lower net interest income (down 30%).

Deutsche Bank AG (DB - Free Report) reported net income of €401 million ($467 million) in Q2, which tanked 13.7% from year-ago quarter. Income before income taxes plunged 13.5% year over year to €711 million ($828.1 million). Lower revenues and higher expenses were the key undermining factors. Also, provisions for credit losses increased. Notably, net asset outflows were recorded during the quarter. Nonetheless, strong capital position was a positive.

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