Shares in global banking giant HSBC (HSBA) were the worst performer on the FTSE 100 on Tuesday, losing 6% to 555p after it reported a 53% fall in full year profits and revealed it would lay off 35,000 staff.
Although group revenues were up 4% to $56bn last year, a combination of higher operating costs – up 22% to $42.3bn due to a goodwill write-off of $7.3bn – and higher provisions for bad loans meant earnings fell from $12.6bn to just $6bn.
The bank recorded impressive growth in its Asian unit, with revenues up 7% to $30.5bn and profits up 6% to $18.6bn, but the European and US businesses ‘are not delivering acceptable returns’ in the words of chief executive Noel Quinn.
As part of its plan ‘to increase returns for investors, create the capacity for future investment, and build a platform for sustainable growth’, the bank is cutting costs and the amount of capital it uses in its under-performing businesses and allocating more capital to the parts of the firm which are doing well.
Essentially this means cutting the bank’s risk-weighted assets by $100bn by the end of 2022 and slashing jobs at its investment bank, with the group headcount ‘likely to go from 235,000 to closer to 200,000 over the next three years’ according to Quinn.
TOO EARLY TO BUY
We said a year ago that investors should avoid HSBC because among other things its investment banking unit soaked up too much capital and generated too low a return, so it’s encouraging to see management finally getting to grips with the issue.
However, investors clearly don't feel this is the moment to step in and buy the shares, as shown by today's reaction.
Unfortunately the bank’s Asian focus – which served it so well last year – is likely to become a headwind this year as the Chinese and Hong Kong economies struggle to cope with the impact of the coronavirus outbreak. The bank simply says that the virus ‘may impact performance in 2020.’
Meanwhile the failure to appoint a permanent chief executive appears to show a lack of urgency. The bank says the search is ‘ongoing’ and it expects to make an announcement in the next six to 12 months but the market is clearly unimpressed.