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Fitch: HSBC's Restructuring On Track, Earnings Prospects Weak
February 22, 2017 / 2:39 PM / 9 months ago

Fitch: HSBC's Restructuring On Track, Earnings Prospects Weak

(The following statement was released by the rating agency) HONG KONG/LONDON, February 22 (Fitch) HSBC Holdings plc's large reported net loss of USD4bn in the last quarter of 2016 is a reminder of the magnitude and challenges of its transformation, which management initiated in 2011 and is on track to complete in 2017, Fitch Ratings says. The bank is likely to maintain steady revenue and low volatility in underlying earnings due to its diversified businesses and good risk control. However, Fitch expects earnings prospects in 2017 to remain weak as revenue growth is likely to be marginal while expenses will remain high. The drop in HSBC's reported profit before tax (PBT) to USD7.1bn in 2016 from USD18.9bn in 2015 was driven by non-recurring and non-operating charges of USD12.2bn, of which USD6.1bn were booked in the last quarter. The main items were USD3.1bn in investments in cost-saving initiatives, USD3.2bn in goodwill impairments, USD1.8bn in valuation losses from changes to its credit spread and USD2.1bn in losses related to trading losses and the disposal of the Brazilian business. Regulatory provisions, and legal and redress charges amounted to USD1.6bn. HSBC falls significantly short against its reported, medium-term ROE target of above 10% (2016: 0.8%, 2015: 7.2%). A risk-adjusted metric, based on the bank's adjusted PBT of USD19.3bn for 2016 (-1% yoy), indicates performance improved to 2.1% as RWAs fell by USD245.8bn in 2016, from 1.9% in 2015. About three quarters of PBT comes from Asia, with Europe and the MENA region each contributing over 8%, North America nearly 7% and Latin America just over 1%. Adjusted revenue of USD50.2bn (-2% yoy) held up reasonably well, despite, among other factors, a 5% decline of revenue synergies between the divisions to USD10.5bn, or 21% of the total. Its global markets activities had a solid year, with overall revenue rising 10% as it benefitted from market share gains in Europe in credit and rates. FX revenue was also higher, although equities revenue declined by 28% due to lower trading volumes in Europe and Asia. Retail banking revenue was supported by increasing deposit balances in the UK and Hong Kong while revenue from lending and wealth management fell, the latter in particular related to mutual funds and retail securities. Commercial banking performed well, but revenue growth was muted. Tracked network-related revenue improved, with transaction banking revenue up 2% to USD14.7bn in 2016 (29% of total adjusted revenues) on steady performance of cash management services while global trade and receivables finance revenue weakened. Revenue from international subsidiaries of US clients increased by 11% yoy and commercial banking in each region generated between 8%-25% of revenue for another region. HSBC will spend another USD2bn in 2017 on cost-saving initiatives. The decline in adjusted expenses by 3.4% in 2016 highlights HSBC's cost control. Variable pay declined to 19% of wages and salaries in 2016 from 20% in 2015. Revenue headwinds in 2017 stem from a variety of sources; individually they are not material but collectively they could become more meaningful given the challenges to grow the business. They include USD0.9bn in annual interest expenses (2016: USD0.4bn) on regulatory required issuance of loss-absorbing debt. Management expects compliance-related costs to peak in 2017, increasing by more than 10% yoy (2016: USD3bn) but they will remain at high levels. In addition annual revenue could be USD2bn lower if unfavourable foreign-exchange movements in January 2017 were to persist. Lower UK interest rates could lead to a USD0.3bn reduction in revenue in 2017 and the accelerated run-off in US consumer and mortgage loans is expected to result in a revenue gap of USD0.6bn in 2017. We expect the composition of HSBC's China-exposure (USD146bn) to continue to shift towards loans in Guangdong province (+16% to USD4.7bn at end-2016), mortgages (+51%) and credit cards, which HSBC started issuing in 4Q16. HSBC's consolidated 13.6% CET ratio and sizeable distributable reserves of USD42bn at end-2016 allow the bank to pay high dividends and buy back shares. Its NPL ratio of 1.9% at end-2016 improved from 2.3% at end-2015, but remains above global trading and universal bank peers'. Contact: Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central Hong Kong Christian Scarafia Senior Director +44 20 3530 1012. 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