Fluff
HSBC's pattern of clumsy execution continued in the first quarter of the first full financial year to be overseen by new top management, CEO John Flint and Chairman Mark Tucker. As in the first and final quarter of 2017, under CEO Stuart Gulliver, quarterly performance was somewhat disappointing due to circumstances unforeseen. True, HSBC (LON:HSBA) flagged a new investment phase with 2017 finals in February, noting it planned to spend $5bn-$7bn on strategic initiatives. Relative to that guidance though, it has slightly fluffed the year’s first quarterly profit outcome. That includes falling short of consensus forecasts that the bank customarily compiles itself, suggesting it has again missed opportunities to mediate market expectations. The ultimate cause though, looks like ineffective marginal cost control.
Negative and positive surprises
Both underlying profit before tax of $6bn and reported PBT at $4.8bn missed forecasts with falls of 3% and 4% respectively compared with the Q1 2017. Revenues rose 3% to $13.9bn after adjustments. Encouragingly, this was due to rising deposits and improving margins. But an 8% rise in adjusted operating costs to $8.2bn was a negative surprise and largely responsible for the profit shortfall to expectations. The news sent HSBC stock as much as 3% lower on Friday. The announcement of a new share buyback programme looked like attempted compensation. HSBC had, after all, left shareholders hanging in the first quarter on that subject. And it was also notable that the buyback of up to $2bn shares is expected to be the only one announced this year, adding to the impression that it was not so long in the planning.
No alarm bells
To be sure, there were no disasters in the quarter. HSBC’s capital position remains robust; the ratio of core capital to risk weighted assets was 14.5% in Q1, unchanged from the end of the last financial year. The fall in Return on Tangible Equity to 8.4% from 9.1% was unwelcome, not alarming. Few banks are expected to maintain a straight line of improving returns quarter to quarter; annual advancement is more imperative. With the main sweep of HSBC’s reorganisation out of the way, the path for progress after its lowest ever underlying ROE in 2016, remains clear. The bank indicated its flagship Retail Banking and Wealth Management division was still a key driver. Mortgage lending grew in the UK by $1.8bn in Q1, and lending growth in Asia, primarily in Hong Kong, rose by $14.2bn. Elsewhere, exposure to rate rises due to sheer scale of dollar deposits continued. A further $400m addition to group revenue would be possible if the Fed and Hong Kong’s central banks were to tighten by a further 25 basis points.
Worrying pattern
Still, frequent unpleasant surprises from an overall sturdy global lender are a worrying pattern for investors to factor in. Particularly given that apart from these missteps, and normal market ebb and flow, HSBC shares have outperformed in recent years. They remain 6% higher over 12 months even after the market setback earlier in the year, with a sector-leading 60% rise over two years. Furthermore, incomplete guidance and difficulties in accurately steering performance are inevitable, particularly for global banks. Getting a reputation for such happenstance though, is damaging. For one thing, it can reduce investors’ patience with weak spots like North America and Europe, where the bank’s underlying profit slumped in the quarter (though Europe’s 72% tumble was partly linked to accounting changes).
Attributable returns to shareholders should survive HSBC’s shaky first-quarter performance; guidance has not changed. But HSBC shares had reversed by about 5% this year ahead of Friday’s earnings, and last stood 8% lower. Investors continue to be well reimbursed by the high-yielding bank, but their patience is wearing thin.
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