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LONDON (Alliance News) - HSBC Holdings PLC's annual results left the market underwhelmed Monday as the banking giant missed expectations with a 17% drop in annual pretax profit as numerous fines, settlements and provisions for customer compensation took their toll on earnings.
HSBC, which is the largest London-listed bank by market capitalisation, said it made an USD18.68 billion pretax profit in 2014, compared with USD22.57 billion in 2013. According to consensus estimates compiled by the company, financial analysts had expected HSBC to report a pretax profit of USD20.95 billion.
While the holding company's commercial banking business reported an increase in pretax profit to USD8.74 billion from USD8.44 billion on the back of growth in its home markets of Hong Kong and the UK, its global banking and markets investment banking business reported a 38% drop to USD5.89 billion due to a weak fourth quarter for the industry as a whole.
The retail banking and wealth management division reported a 15% fall to USD5.65 billion. Meanwhile, the private banking division's pretax profit rose to USD626 million from USD193 million.
Operating expenses swelled to USD41.25 billion from USD38.56 billion, driven by the USD1.19 billion of settlements and provisions made in connection with authorities' investigations into alleged manipulation of the foreign exchange market, including USD809 million in the fourth quarter.
The cost of UK customer redress programmes crept up to USD1.28 billion from USD1.24 billion in 2013, again including USD340 million in the final quarter of last year. The group also booked a USD550 million charge after settling with the Federal Housing Finance Agency in September over mortgage-backed securities bought by Fannie Mae and Freddie Mac in 2005-07.
Still, HSBC increased its dividend per share to USD0.50 from USD0.49.
However, the group also said it is cutting its return on equity target to "more than 10%" from its previous target of between 12% and 15%, as return on equity fell to 7.3%, compared with 9.2% in 2013. The group said its cost target will be to grow revenue faster than costs on an adjusted basis.
According to HSBC's annual report, Chief Executive Stuart Gulliver was paid GBP7.6 million in 2014, compared with GBP8.0 million in 2013, as the variable element of his pay fell by 39% to GBP3.4 million. Chairman Douglas Flint was paid GBP2.5 million, compared with GBP2.4 million in the prior year.
Gulliver said that 2014 was a challenging year in which the bank's efforts to improve its performance were carried out against a backdrop of a higher operating cost base.
"Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters. Many of the challenging aspects of the fourth quarter results were common to the industry as a whole. In spite of this, there were a number of encouraging signs, particularly in commercial banking, payments and cash management and renminbi products and services. We were also able to continue to grow the dividend," Gulliver said.
Flint weighed in on what he called a "very broad range of uncertainties and challenges" that await in 2015, most of which he thinks are outside the banking group's control. However, he highlighted the question of whether the UK will remain a member of the EU as a particular concern for HSBC.
"One economic uncertainty stands out for a major financial institution headquartered in the UK, that of continuing UK membership of the EU. Today, we publish a major research study which concludes that working to complete the Single Market in services and reforming the EU to make it more competitive are far less risky than going it alone, given the importance of EU markets to British trade," Flint said.
The weeks running up to the annual results statement have been dominated by allegations made in a series of reports in the national press that HSBC's Swiss private banking unit helped clients to evade UK tax between 2005 and 2007, prompting an apology signed by Chief Executive Stuart Gulliver. On the eve of the results, the Guardian reported that Gulliver held about GBP5 million in a Swiss account but the report did not allege wrongdoing. In a conference call with reporters, Gulliver said he has "never paid less than the marginal UK tax rate" on his HSBC earnings.
Monday's results statement included an apology by Douglas Flint, who said the disclosures around the Swiss private bank's "unacceptable historical practices" are a reminder of how important it is to show "constant vigilance" over its controls and compliance.
"In response to, and in parallel with, the tax investigations prompted by the data theft more than eight years ago, we have been completely overhauling our private banking business, putting the entire customer base through enhanced due diligence and tax transparency filters. Our Swiss Private Bank customer base and the countries we serve are now both about one-third of the size they were in 2007," Flint said.
HSBC shares were down 5.0% at 574.98 pence near the close Monday, joining emerging markets banking rival Standard Chartered PLC as the worst performers in the FTSE 100. Standard Chartered shares were down 5.1% at 924.10 pence late Monday.
Standard Chartered, which many analysts fear could turn to raising equity to bolster its capital ratios, is due to report lower pretax profit when it publishes annual results on Wednesday next week.
According to consensus estimates compiled by Standard Chartered, financial analysts expect the bank to report a USD5.72 billion pretax profit for 2014, excluding a USD300 million settlement with US authorities paid last August, when it releases results on March 4. That compared with a USD6.345 billion pretax profit reported for 2013.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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