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HSBC (HSBC) Q1 Earnings Down Amid Challenging Backdrop

HSBC Holdings plc HSBC reported dismal first-quarter 2016 results. The company recorded a net income of $4.5 billion, down 20% from the year-ago quarter. Challenging operating backdrop was the primary reason for decline in profit.

HSBC rose nearly 1% in pre-market trading on NYSE, which, we believe, reflects investors’ bullish stance given the continued success of its cost savings plan. Also, the company’s decision to keep the dividend payout intact (at the time when many European banks are slashing or omitting dividends) perhaps kept the investors’ sentiments positive. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.

Results were hurt by decline in revenues and higher loan impairment charges. Though the quarter witnessed a steady progress in HSBC’s cost-saving initiatives along with an absence of fines and settlement charges, these were not sufficient to support the bottom line.

Performance in Detail (On Adjusted Basis)

Total revenue of $13.9 billion declined 4% year over year. The decrease mainly reflected 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 significantly year over year to $1.2 billion, mainly owing to the stressed oil & gas, and metals & mining sectors. The rise is in line with management’s projection.

Total operating expenses inched down 1% year over year to $7.9 billion. The decrease was largely driven by success of the company’s restructuring plan and cost-saving initiatives.

Profit before tax was $5.4 billion, a decrease of 18% from the prior-year quarter.

Performance by Business Line

Retail Banking and Wealth Management: The segment reported $1.3 billion in pre-tax profit, down 30% 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 $2.1 billion, a decline of 11% from the year-ago quarter. The fall was mainly triggered by lower revenues and higher loan impairment charges, partly offset by a decrease in operating expenses.

Global Banking and Markets: Pre-tax profit for the segment was $2.1 billion, down 30% from the prior-year quarter. The decrease was largely due to lower revenues and higher loan impairment charges, partly offset by a decrease in operating expenses.

Global Private Banking: Pre-tax income for the segment was $110 million, up 69% from $65 million recorded a year ago. The rise was supported by absence of loan impairment charges and a fall in operating expenses, partially offset by a decline in revenues.

Other: The segment recorded a pre-tax income of $692 million, substantially up from $49 million recorded in the year-ago period. The improvement reflected a higher top line, partly offset by a rise in operating expenses.

Profitability and Capital Ratios

HSBC’s profitability ratios deteriorated, while capital ratios remained strong. Annualized return on equity (“ROE”) was 9.0%, down from 11.5% as of Mar 31, 2015. Pre-tax return on risk-weighted assets (annualized) was 2.0%, down from 2.4% in the prior-year period.

The company’s common equity Tier 1 ratio (transitional) as of Mar 31, 2016 was 11.9%, on par with Dec 31, 2015 level. Further, leverage ratio was 5%, in line with Dec 31, 2015.

Our Take

By disposing unprofitable/non-core operations, HSBC has been striving to improve its profitability amid a challenging environment. The company is poised to benefit from its extensive global network, strong capital position, cost-containment measures, business re-engineering initiatives and a solid asset growth.

Nevertheless, 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.

HSBC currently carries a Zacks Rank #5 (Strong Sell).

Performance of Other Foreign Banks

HDFC Bank Ltd. HDB reported fourth-quarter fiscal 2016 (ended Mar 31) net profit of INR33.74 billion ($0.50 billion), up 20.2% year over year. Quarterly results continued to reflect top-line growth with improvement in both net interest income and non-interest revenues. However, elevated operating expenses as well as provisions marginally weighed on the results.

Deutsche Bank AG DB reported net income of €236 million ($260.3 million) in the first quarter of 2016, down 57.8% year over year. The quarterly results were affected by lower revenues and higher provisions. However, the reduction in non-interest expenses was a positive factor.

Barclays PLC’s BCS first-quarter 2016 pre-tax earnings of £793 million ($1.14 billion) declined 25% year over year. A challenging industry backdrop had adverse impact on the company’s investment banking income and trading revenue. Further, a rise in credit impairment charges was an undermining factor. However, decline in operating expenses and a stable net interest income acted as tailwinds.

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