HSBC misses estimates as Gulliver hands over CEO baton to Flint

Bloomberg

Stuart Gulliver’s final set of results at HSBC Holdings Plc weren’t quite the swansong he’d hoped for as he hands the reins over to his long-term lieutenant, John Flint.
Europe’s largest bank missed estimates for fourth-quarter revenue and profit as it became the latest firm to take a hit on two high-profile corporate failures and post a sharp decline in trading income at its investment bank, the lender said on Tuesday.
“The results were decent enough, but nothing earth-shattering,” said Hugh Young, head of Asia at Standard Life Aberdeen Plc, one of the bank’s top shareholders. HSBC is “firmly on the course set by Stuart and Douglas Flint with more to go for; it would be great if they get to a 10 percent return on equity from the current 5.9 percent,” referring to the industry’s measure of profitability.
HSBC dropped 2.1 percent in Hong Kong as of 3:35 p.m. local time on Tuesday, after earlier declining as much as 3.2 percent. The bank’s shares fell 2.8 percent to 739.60 pence at 8:04 a.m. in London.
Flint, who takes over Wednesday, inherits an Asia-focussed bank back in expansion mode after years of restructuring during which it lost $20 billion of revenue. After shrinking and imposing central control over the lender’s far-flung global network, while enduring several misconduct issues, investors are now looking for a return to growth. During his last year, Gulliver managed to arrest a six-year slide in income and positioned the bank to return more cash to investors in the second quarter.

RARE MISS
Today was a rare miss for investors who’d gotten used to Gulliver beating profit estimates, at least in the latter part of his tenure. The outgoing CEO delivered higher-than-forecast adjusted net income in six of the previous seven quarters, according to data compiled by Bloomberg.
A major culprit were chunky loan impairments, which were about $188 million higher in the quarter than a year earlier, “largely driven by two individual corporate exposures in Europe,” HSBC said in the statement. The two companies responsible were Steinhoff International Holdings NV — the South African retailer engulfed in an accounting scandal, which owns businesses in Britain — and Carillion Plc, the UK construction company that imploded earlier early this year, a person familiar with the figures said, who asked not to be identified speaking about confidential data.
The losses helped drive down adjusted pretax profit to $3.6 billion in the fourth quarter, undershooting the lowest estimate among five analysts surveyed by Bloomberg News. While revenue rose 10 percent to $12.4 billion, it failed to match the $12.7 billion analysts had expected.
HSBC’s strategy to redeploy $100 billion or more of assets to Asia is also paying off. Fourth quarter profit rose 23 percent in the region, where it makes more than three-quarters of its earnings, compared with a 29 percent decline in Europe.
At the markets business, revenue fell 19 percent, driven by a 48 plunge in rates and a 24 percent drop in fixed income and currency trading. That was better than Wall Street peers that collectively posted a 30 percent drop in markets revenue in the final three months of the year, and in line with Deutsche Bank AG where trading revenue declined 27 percent.
Softening the blow for shareholders is the prospect of more cash being returned this year. Finance Director Iain Mackay said HSBC will look at buying back more shares in the second quarter of the year once it has completed a $5 billion to $7 billion debt issuance program. HSBC has repurchased $5.5 billion since mid-2016 and analysts at UBS Group AG forecast another $4 billion this year.
Like many other global financial firms, HSBC took a $1.29 billion hit from President Donald Trump’s changes to the US tax rate. The firm’s common equity Tier 1 ratio fell to 14.5 percent from 14.6 percent at the end of September, still above its target range of 12 percent to 13 percent.
The bank’s net interest margin in the fourth quarter fell from a year earlier, which executives blamed on lower yields on customer lending and margin compression in Europe and Asia. Another black mark for Gulliver: return on equity for 2017 came in at 5.9 percent, far below the bank’s target of 10 percent. Seven years ago, Gulliver said his time at HSBC should be judged by the share price and the bank’s public standing. After an inauspicious start and a few shaky years in the middle, he can claim at least partial success on his own terms.
“As I prepare to pass on the stewardship of HSBC to my successor, I am proud of our achievements,” Gulliver said in a statement. “After the most extensive transformation programme in HSBC’s 153-year history, HSBC is simpler, stronger and more secure than it was in 2011, and better able to connect customers to opportunities in the world’s fastest growing regions.”