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HSBC drags sector peers lower as it kicks off busy week of UK bank earnings

Published: 11:14 21 Feb 2017 GMT

HSBC
HSBC reports worse-than-expected full year profits

Banking shares are under pressure today after HSBC Holdings plc (LON:HSBA) reported disappointing full year profits - the first of the UK’s major lenders scheduled post annual results this week.

The bank posted pre-tax profit of $7.1bn in the year to 31 December 2016 on a reported basis, down from $18.9bn the previous year. Analysts had expected profits of $14.4bn, according to Thomson Reuters data.

Read: HSBC's full year profits miss forecasts on one-off costs

The drop in profits reflected a $3.2bn impairment of goodwill in the company’s global private banking business in Europe and the impact of the sale of its operations in Brazil. 

Reported revenue fell to $47.9bn from $59.8bn, primarily due to foreign exchange movements and significant items, including operating results for the Brazil business and the loss recognised on its disposal.

Following the sale of the Brazil business, the group completed a $2.5bn share buy-back and cut its risk weighted assets to $857,181 in 2016 from $1.2mln a year earlier.  A further $1bn buy-back was announced, which missed analysts’ expectations for an ongoing $2.5bn.

The common tier 1 ratio rose to 13.6% from 11.9%, missing market expectations of 13.8%. The tier 2 capital fell to $34.44bn from $36.53bn.

The dividend was left at 51c per share, taking the total for the year to $10.1bn.

Watch: HSBC losses trigger 'intense negative investor reaction'

Despite the earnings miss, Goldman Sachs said it believes the Hong Kong and London-based giant is growing at a fast enough pace to mitigate the effects of the headwinds it is facing.

“[The] fourth-quarter results show encouraging signs for loan growth in both Hong Kong and the UK mortgage business,” the Wall Street giant said in a note to clients.

Goldman pegged back its valuation of the stock to 750p a share from 775p, keeping its 'neutral' recommendation.

Morgan Stanley said it thinks HSBC has too much regulatory capital. “HSBC has plenty of long-dated regulatory capital currently in issue, but much of its Tier 2 loses regulatory capital treatment from 1 January ,2022 due to either being issued from an operating company or being governed by non-EU law with no contractual recognition of EU bail-in power.”

HSBC expects to issue about $3-4bn in new Tier 2 in 2017 and Morgan Stanley sees the bank closing the year with a $17-18bn excess of Tier 2 if the situation remains the same.

The lender was the biggest faller on the FTSE 100 in morning trade, dragging sector peers lower on a negative read-across.

This week sees full year results from Lloyds Banking Group plc (LON:LLOY) on Wednesday, Barclays plc (LON:BARC) on Thursday and Royal Bank of Scotland (LON:RBS) on Friday.

“Having helped lead the way yesterday, banks are today’s index millstone after disappointing fourth quarter/full year results from heavyweight HSBC (-6.1%) spooked investors in sector peers ahead of report cards this week expected to show profits progress for Lloyds and Barclays to keep their shares in post-Brexit uptrends, but RBS still struggling with legacy issues,” said Mike van Dulken, head of research at Accendo Markets.

“Profits for banking behemoth HSBC, however, fell a whopping 62%, and although the full year dividend was held, some are disappointed with the scale of the share buyback programme.”

Ahead of the results, Hargreaves Lansdown’s senior analyst Laith Khalaf said banks’ earnings look like they will be a mix of “the good, the bad and the ugly”.

Royal Banking Group is expected to report an eye-watering loss of £6.1bn as it sets aside a further $3.8bn for expected fines from US authorities over the way it packaged up and sold mortgages almost a decade ago.

A key focus for investors will be the company’s plans to scrap its sale of Williams & Glyn branches and instead set up a fund to help smaller challenger banks.

Meanwhile, Barclays is forecast to report a pick-up in pre-tax profit to £3.9bn, compared to £2.05bn the previous year. 

As with HSBC, Khalaf said Barclays has benefited from currency tailwinds, as it sees its restructuring starting to finally gain traction.

Lloyds is also expected to reveal it is in better shape but analysts see a conservative dividend as the lender digests its £1.9bn acquisition of MBNA’s UK credit card business.

“Lloyds still remains in decent shape, though it’s the canary in the coalmine as far as Brexit is concerned, given how thoroughly it is plugged into the grass roots of the UK economy,” said Khalaf.

“Meanwhile RBS is heading in the right direction, just very slowly. The bank is on course to report a ninth consecutive year of losses, and the light at the end of the tunnel is still obscured by US litigation and its divestment of Williams & Glyn, though progress appears to be afoot in the form of a new Treasury proposal to satisfy the European competition authorities without spinning off a new challenger bank.”

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