Don’t bank on HSBC being out of the woods yet

 
Marc Sidwell
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BOTTOM LINE

A BOOST to HSBC’s fourth quarter dividend of ten per cent attempted to send a bullish signal yesterday. Yet the idea that the group is on its way out of the woods generated little enthusiasm. Shares fell despite talk of “significant progress” from chief executive Stuart Gulliver.

It is not hard to see why. Reported profit after tax was down by $2.7bn (£1.7bn) or 15 per cent from 2011 to 2012. Underlying profit before tax was up by 18 per cent or $2.5bn, but largely thanks to loan impairment charges improving by 22 per cent ($2.2bn). Growth in underlying operating expenses outpaced revenue growth, with costs up by $4.3bn year on year while underlying revenue grew just $4.2bn.

Such figures make HSBC look an expensive place to invest your money in the near term. Better dividends may dull the pain but shouldn’t distract from HSBC’s disappointing return on equity, which at 8.4 per cent in 2012 was down further from 2011’s 10.9 per cent, both years falling well short of the bank’s acknowledged 12-15 per cent target.

That said, there were mitigating circumstances for the lower return on equity in 2012. A significant part of the net decline was due to changes in the fair value of the bank’s own debt. That may be good news in a sense, since cost of debt goes up when a firm does better.

Yet for now, as HSBC admitted, its reported return on invested capital in 2012 of eight per cent was a full three per cent lower than its 11 per cent benchmark cost of capital. Which suggests that for now at least HSBC isn’t creating but destroying value. HSBC’s benchmark cost of capital in 2013 has been lowered to 10 per cent, partly due to money printing and other interventions by central banks. So this year’s lower target should be easier to outpace. But Gulliver has miles to go and promises to keep before HSBC can proclaim itself out of the woods.