HSBC bungles credit for another great year

HSBC bungles credit for another great year 

Another bungle

The good news is that HSBC’s remarkable recovery story is still on track. The less good news is that the lender has again bungled communication of sensitive albeit cogent intentions. The upshot is that whilst HSBC’s underlying performance matched expectations in its 2017 financial year, a lack of prior guidance on the impact of U.S. tax reform and about new capital has nixed chances that the stock could see its first rise in 2018, for now.

Strong bank within a strong bank

It’s important not to overstate these negatives. Compared with laboured advances by other giant global banks, HSBC’s $10bn annual pre-tax profit jump confirms its place amongst the strongest and best-run lenders. The rise and rise of HSBC’s bank-within-a-bank, Retail Banking and Wealth Management also continues, with a 6% jump in underlying Q4 profit. RBWM is critical for HSBC’s net interest income (NII) growth due to the group’s large dollar-denominated deposit base. In turn, HSBC’s ability to expand NII is crucial for all-important returns, the ratios investors are most interested in.

Growth in all the right places

Deposits kept growing in 2017, and more importantly they kept growing in Hong Kong. Group NII trend stayed positive for most of the year too, including an 8% rise at RBWM. Asia contributed almost 90% of pre-tax profit, and the region even slightly surpassed the pace set early in the year with annual growth of 6.5%. As for key returns, HSBC inched ever closer to its 10%-plus Return on tangible equity (ROtE) target – at least on a ‘clean’ basis. Excluding the messy stuff, ROtE was 9.3% in 2017, after notching 8.2%, excluding items, in 2016.

How to spend $5bn-$7bn

The problem is of course, that the messy stuff counts. And whilst HSBC is in a better position to grow than most rivals, progress would be faster and execution risks more favourable if HSBC shrunk further and became even more focused than it has since departing chief Stuart Gulliver took over. That’s where fresh capital of $5bn-$7bn would come in handy. We think most investors would agree with that use of new capital. Unfortunately, Tuesday was the first time most investors heard such plans. It is little surprise HSBC shares were slapped by as much as 5% on Tuesday with calculus pivoting away from a potential new share buyback to a cash call. Other let downs accumulate the effect, chiefly HSBC’s silence on the writedown for U.S. tax reform that left market profit forecasts $2.6bn too high.

New “piece of work”

Still, the “piece of work” new CEO John Flint is overseeing “around the U.S. business” will almost certainly involve much anticipated changes there. The sub-scale operation has burdened results for almost two decades. A wholesale disposal is far-fetched but a significant restructuring with similar effects likely. Additional capital leeway could make the move relatively painless. Other loose ends that Flint could deploy fresh funding on include HSBC’s Mexican bank, now its most obvious non-core asset. The problematic 19% stake in Chinese rival Bank of Communications could benefit from similar treatment. These moves would hit revenues and income but would be capital accretive.

So after another year of glowing health, with logical moves planned, shareholder rewards on top of dividends have been delayed, not cancelled. After all, a capital ratio lodged well above 14% in 2017 jars with the lack of a buyback. Shares, which have almost stagnated since 2017 interims, could drift lower until Flint details his intentions in July though.