London: HSBC posted an unexpected fourth-quarter loss as income from lending fell, loan-impairment charges increased and it booked fair-value losses on its debt.
The shares fell as much as 4.5 per cent as Europe’s largest bank reported a pretax loss of $858 million. Excluding one-time items such as a $773 million charge on movements in the fair value of its debt, the lender had a pretax profit of $1.9 billion. Both measures fell short of analysts’ estimates.
The result, depressed in part by the rising cost of bad loans to oil and gas companies suffering from crashing energy prices, marks a setback to chief executive officer Stuart Gulliver’s efforts to bolster profitability and reverse a share slump. In June, the CEO unveiled a new strategy to boost investment in Asia, exit unprofitable countries and cut as many as 25,000 jobs to help save as much as $5 billion by the end of 2017.
"Weakness in revenue and higher impairment" fueled the miss, said Raul Sinha, an analyst at JPMorgan Chase with an underweight rating on the stock. The "impairment spike was driven by oil and gas" and "weak" performance in Asia, where the bank makes most of its profit.
Impairments on bad loans and credit-risk provisions increased by 32 per cent to $1.64 billion in the quarter. That took full-year charges to $3.7 billion, exceeding the consensus analyst estimate of $3 billion. The increase in bad-loan charges in HSBC’s wholesale banking division, which accounted for almost $1 billion of loan impairment charges in the quarter, was driven by the oil and gas sector, the company said.
HSBC dropped 4.4 per cent in London, bringing its loss this year to 20 per cent. In Hong Kong, the shares lost more than 2 per cent to HK$49.10 after advancing as much as 2 per cent earlier in the day.
"There is a lot to do to achieve our targets but we have made a good start," Gulliver said in the earnings release. He said HSBC reduced risk-weighted assets by $124 billion last year, taking it almost half-way toward the target for the end of 2017.
While HSBC targets positive "jaws," the difference between the rate of revenue and cost growth, the measure was negative 3.7 percent for the year. The bank made a 7.2 per cent return on equity, falling short of its target of more than 10 per cent. Revenue in the fourth quarter tumbled 18 per cent to $11.8 billion as net interest income fell to $8.1 billion.
"Given a demonstrably weaker revenue outlook, we certainly hope for fresh cost reduction initiatives to go well beyond existing targets," said Ian Gordon, an analyst at Investec Plc who has a buy rating on the shares. Without deeper cuts, "a return on equity of more than 10 percent is likely to remain elusive — even by 2018."
The bank declared a dividend of 21 cents for the fourth quarter, taking the total for the year to 51 cents. That’s 1 cent more than last year, maintaining the bank’s progressive dividend policy valued by investors.
Operating costs in the period amounted to $11.5 billion, down from $11.9 billion a year earlier. HSBC cut the annual bonus pool about $100 million to $3.5 billion, as overall employee compensation fell to $19.9 billion from $20.4 billion, according to the annual report. CEO Gulliver had his variable pay for 2015 cut £361,000 ($513,000) to 3 million pounds, reducing his total compensation to the lowest as CEO.
Its end-point common equity Tier 1 capital ratio rose to 11.9 per cent from 11.1 per cent a year earlier. "Maintaining these trends while boosting revenue will be the principal challenge in the year ahead," Gulliver said in the statement, as he warned of an "uncertain" economic environment.
Gulliver’s task of turning HSBC around has also been complicated by a slowdown in China, a key element of his "pivot to Asia" strategy. Last week, Gulliver said China’s cooling economy means he may slow the pace of hiring in the Pearl River Delta, where he’s announced plans to add some 4,000 jobs in coming years.
"China’s slower economic growth will undoubtedly contribute to a bumpier financial environment," Chairman Douglas Flint said in the bank’s full-year results statement.
United States authorities are examining whether the bank hired relatives of well-connected politicians or employees of state- owned businesses in the Asia-Pacific region, HSBC disclosed on Monday. Other banks including JPMorgan Chase have said previously that they are facing similar investigations.
Underscoring the difficulty of selling bank assets, HSBC also said it will retain and restructure its unprofitable Turkish unit. The bank had received a number of offers for the business since June, none of which "were deemed to be in the best interests of our shareholders," Gulliver said.