HSBC has called parts of its performance “not acceptable” as it revealed an 18 per cent drop in third quarter profit today, fuelled by weak results in its European and US divisions.
Profit before tax dropped 18 per cent to $4.8bn (£3.8bn) in the three months to the end of September to fall wide of analyst guidance.
Adjusted profit also fell 12 per cent to $5.3bn while revenue slipped three per cent year on year to $13.4bn due to lower client activity in global markets.
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At the same time costs climbed, with operating expenses up two per cent.
Why it’s interesting
HSBC’s share price fell 2.68 per cent in Hong Kong after it revealed its latest financial results.
HSBC’s share price dropped 4.1 per cent in morning trading to 591.9p, down from Friday’s close of 617.4p.
It also dragged down Lloyd’s Banking Group two per cent to 58.8p, while Royal Bank of Scotland fell 1.2 per cent to 223.1p.
The bank abandoned a key target for returns and warned of a “challenging” period ahead as it deals with economy uncertainty caused by Brexit, the US-China trade war and protests in its native Hong Kong.
While HSBC posted a strong performance in Asia, other segments of the bank underwhelmed investors.
Acting chief executive Noel Quinn, who took charge after the unexpected departure of predecessor John Flint in August, blasted those performances as “not acceptable”.
He directed his ire at HSBC’s continental Europe division, its non-ringfenced UK bank and the US unit.
HSBC’s Europe unit sank to a $424m loss, after booking a $634m profit this time last year.
Asia’s profit rose four per cent year on year to $4.65bn.
The Asian banking giant is now “accelerating plans to remodel” these divisions as Quinn said their performances were “no longer sufficient”.
It also warned of “significant charges” to come in the fourth quarter, including restructuring costs, if the economic backdrop worsens.
Citing the tough economic environment, the bank abandoned its key return on tangible equity target of over 11 per cent in 2020.
However, it promised shareholders it would keep its dividend for the time being.
The bank is reportedly set to slash up to 10,000 jobs, the Financial Times has reported, as Quinn undertakes a radical restructure of the bank. Those numbers come on top of 4,700 redundancies already announced.
“The latest numbers from the UK’s biggest bank HSBC appear to underline the recent decision by the bank to remove previous CEO John Flint,” Michael Hewson, chief market analyst at CMC Markets, said.
Ian Forrest, investment research analyst at The Share Centre, added that today’s results were “even more grim” than forecast.
“The new CEO is clearly prepared to take action where possible, especially in Europe, and the commitment to keep a strong balance sheet is also positive for investors,” he said.
“Investors will also be pleased with the news that the dividend is being maintained. However, with dollar interest rates falling and a slowing global economy the background is clearly difficult for the whole sector.”
Quinn refused to be drawn on reports of substantial job cuts, saying he would reveal specific remedial action in February when HSBC announces its annual results.
But he did say he plans to reallocate resources away from continental Europe. He added: “If we take capital out that will affect the revenue and if we take revenue out we’re going to have to adjust the cost base supports that revenue.”
“The returns in Europe are not where we need to be,” the acting CEO added.
AJ Bell investment director Russ Mould said the results showed that HSBC’s management are struggling to change the bank’s direction.
“Just as it is very hard to turn around a super-tanker in midstream, management are finding it very difficult to achieve a change of direction at Europe’s biggest bank HSBC,” he said.
“Given the sorry showing across several metrics it is little surprise the shares have sunk.”
Pointing out that costs are rising faster than income, Mould added: “This is hardly an auspicious start for Noel Quinn, who as acting chief executive officer is auditioning for the role on a permanent basis.
“Given a difficult backdrop and the short time he has been in post a little patience is probably required but, in an unforgiving corporate world, he might not get a second read.
“Along with the Herculean task of bringing simplicity to a business as large and complex as HSBC, the bank has no control over factors such as a US-China trade war, Brexit and the escalating political tensions on its home turf in Hong Kong.”
Ken Odeluga, an analyst at City Index, warned that job cuts seem inevitable to stop the rot.
“Yet the cut of 10,000 jobs mooted looks inadequate,” he added. “That could raise the risk that a new restructuring, like a similar exercise a few years ago, falls short.
“Disposals of the equity operations, or the French retail arm in France have also been aired, but these operations barely dent the asset base. At the same time, the truly radical step of severing incongruous Asia-Pacific and European sides remains off the cards.”
HSBC finished the day down 3.9 per cent at 593.5p, weighing down the FTSE 100’s gains along with a pound flat on today’s Brexit developments. Towards the close of play the blue-chip index rose 0.2 per cent to 7,339 points.
What HSBC said
HSBC chief executive Noel Quinn said:
Parts of our business, especially Asia, held up well in a challenging environment in the third quarter. However, in some parts, performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK, and the US. Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities
Main image credit: HSBC