HSBC Holdings PLC (LON:HSBA) has echoed its banking rival Barclays in warning that trading conditions have worsened, prompting management to sharpen up its axe.
Last week, Barclays PLC (LON:BARC) warned it would struggle to achieve its target of hitting a return on tangible equity (RoTE) above 10% next year; HSBC went further, saying that as the outlook for revenue growth is softer than anticipated at the halfway point of the year, it no longer expects to reach its RoTE target of more than 11% in 2020.
Commenting on the bank’s third-quarter earnings, the interim chief executive officer, Noel Quinn, said that while some parts of the business had done well – notably Asia – other parts had soiled the bed.
“In some parts, performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK, and the US. Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities," Quinn revealed.
The global banking giant plans to turn its back on businesses that are yielding low returns and warned that the restructuring could lead to significant charges in the final quarter and in quarters thereafter. The charges could include the write-down of goodwill – the intangible worth of a business’s brand – plus additional restructuring charges.
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The Financial Times has previously reported that Quinn would attempt to leave his imprint on the bank by turfing more than 4% of the workforce onto the dole. This year, the bank has already announced more than 4,000 redundancies – one of the victims of the cull was the former chief executive officer, John Flint.
HSBC reassured investors that despite the additional restructuring charges, the dividend would be “sustained”.
Revenue in the third quarter fell to US$13.36bn from US$13.80bn the year before, due to lower client activity in its global markets “casino banking” division.
Profit before tax tumbled 18% to US$4.84bn from US$5.92bn, partly as a result of additional customer redress provisions of US$606mln – including another US$388mln to cover possible claims resulting from mis-selling of payment protection insurance (PPI) in the UK – plus severance costs of US$120mln.
Adjusted profit before tax, which excludes items that the company regards as one-off events, fell 12% to US$5.3bn from US$6.1bn the year before; analysts had pencilled in a figure of US$5.7bn.
Reported profit before tax in Asia was up 4% year-on-year to US$4.7bn, with the bank describing the performance in Hong Kong as “resilient”, despite the political unrest on the island.
Having said that, the bank said it had made a US$0.4bn upward adjustment to expected credit losses that included a charge to reflect the economic outlook in Hong Kong.
The Common Equity Tier 1 (CET1) ratio, which is a measure of how much capital the bank has to absorb unexpected losses, remained unchanged at 14.3%. The bank said it intends to maintain its CET1 ratio above 14%.
Liberum Capital said the results were disappointing, and the market reaction would seem to back this up, with the shares down 3.0% at 599.2p in early deals.
“HSBC surprised the market at the interim results when it announced the departure of CEO John Flint after just over 18 months at the helm, with Chairman Mark Tucker apparently frustrated about the pace of operational change in the business. Poor performance in Q3 and a challenging revenue outlook increases the pressure on interim CEO Noel Quinn (a potential candidate for the permanent role) to deliver on further business remodelling in order to improve performance,” Liberum said.
“Given its premium rating versus the rest of the quoted mainstream UK banks, HSBC is the one stock that is not already pricing in a significant deterioration in performance. As such, the shares are likely to respond poorly today and we also expected to downgrade our current 665p fair value, which was offering just 8% upside in any case,” the broker added.