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HSBC full-year profits jump but shares fall as results miss forecasts

Stuart Gulliver has delivered his last results as chief executive
HSBC said its pivot to Asia has been paying off

Outgoing HSBC Holdings (LON:HSBA) chief executive Stuart Gulliver unveiled that full year profits more than doubled on another strong performance in Asia but results missed analysts’ expectations.

Pre-tax profit surged 141% to US$17.2bn in 2017 from US$7.1bn a year earlier when the bank incurred a string of one-off costs, including the sale of its Brazil business.

Adjusted for one-off items and currency fluctuations, pre-tax profit grew 11% to US$21bn from US$18.9bn in 2016 and adjusted revenue increased 5% to US$51.5bn from US$47.9bn.

HSBC said its pivot to Asia has been paying off, with the region, accounting for nearly nine-tenths of total profits last year.  Pre-tax profits from Asia rose by 89.3% from a year earlier to US$15.3bn, compared to a loss of US$1.9bn in Europe.

The results fell short of market forecasts, sending shares down 4.3% to 727.50p in morning trading. 

However, analysts’ estimates did take into account a US$1.3mln writedown in 2017 resulting from the US tax reform.

Gulliver meets most of his targets under restructuring plan

It was the last earnings under Gulliver, who led the bank’s overhaul, which included cutting thousands of jobs, bringing in new leadership and selling off businesses across the globe to focus on emerging markets in Asia.

Gulliver, who is being replaced by John Flint, said many of the targets set out in the restructuring plan in 2015 have been met. 

Since putting the plan into action, the bank has cut more than US$6bn in costs and shed US$338bn in risk-weighted assets. But return on equity is still well below the bank’s 10% target at 5.9% in 2017.

HSBC is simpler, stronger, and more secure than it was in 2011,” Gulliver said in a statement.

“It has been my great privilege to lead HSBC for the last seven years, and in handing over to John I am confident the organisation is in great hands."

As part of the Gulliver’s strategy, the bank has been focusing on Asia, expanding in Hong Kong and China's heavily populated Pearl River Delta area.

HSBC works to put scandals behind it

HSBC has also made progress in repairing the bank’s image following series of scandals.

In December, the US Department of Justice dismissed deferred criminal charges for allegations of money laundering and evading sanctions.

READ: HSBC agrees to pay civil penalty as US agencies launch criminal and civil actions into "spoofing"

A month earlier, HSBC agreed to pay €300mln to French authorities to settle an investigation into claims it helped clients of its Swiss private bank dodge taxes.

READ: HSBC pays €300mln to French authorities to settle tax probe into Swiss bank

Like its peers, the bank has strengthened its balance sheet to cushion the blow in the event of another financial crisis. Its common equity tier 1 ratio, a measure of capital, rose to 14.5% from 13.6% a year ago.

HSBC plans to raise between US$5bn and US$7bn in additional tier 1 capital in the first half of 2018.

HSBC positive on outlook for global economy 

The lender said it expects the world’s major economies to show “reasonable growth” in 2018, helped by relatively low unemployment, recovering consumer confidence and improving trade.

“Fears of a hard landing in China have receded, and markets across Asia look set for a strong year,” said chairman Mark Tucker.

“The anticipated conclusion of large regional trade agreements in 2018, mostly involving Asian nations, also provides cause for optimism.”

He noted that rising international tensions and the threat of protectionism were among the risks that have the potential to disrupt economic activity but believes HSBC is well equipped to withstand any knocks thanks to stable revenue generation and capital strength.

HSBC left its dividend unchanged at 51 cents. 

"A better capital position could strengthen the argument for higher dividends in time, yet investors may have to wait another six months for new chief executive John Flint to deliver his strategic review before learning about future dividend intentions," said AJ Bell investment director, Russ Mould.

"For now, HSBC yields about 4.8% which leaves it lagging behind Lloyds Banking Group whose dividend yield is more in the region of 6% based on forecasts for 2018."

Asia focus poses risks, says analyst

Laith Khalaf, senior analyst at Hargreaves Lansdown, warned that HSBC's focus on Asia comes with risks attached. 

"The strength of HSBC’s share price over the last two years has a lot to do with better than expected economic performance from China," Khalaf said. "That’s all well and good, but this cuts both ways, and looking forward if China sneezes, HSBC is going to catch a nasty cold."

Mike van Dulken, head of research at Accendo Markets, reckons Gulliver has a lot to be proud of during his tenure, having steered the bank through money laundering allegations, a major restructuring and regulatory changes amid an evolving post-financial crisis backdrop.

"No CEO likes to see their shares trade lower on results day, let alone your last day in the office," he said.

"However, departing with an 8 out of 10 report card (2015 targets set by himself), the share price significantly off Brexit lows, the bank’s reputation much stronger and revenues back to growth, I think he’ll be more than able set sail into the sunset rather content with what he has achieved for investors over seven years, rather than focusing too much on what markets think about the latest quarter."

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