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Posted on 14 March 2016, 7:41 AM

Not Going Home: HSBC and its Pivot to Asia

Other Insights on Related Shares: HMUS.L, HSBA.L

Investors were expecting more, in the week after the Hong Kong and Shanghai Banking Corporation – HSBC - made its final decision known regarding whether to stay in the UK or return to Hong Kong, the city where it was based until 1990. The announcement that it would continue to have its legal headquarters in the UK, with the regulatory and fiscal repercussions this would entail, was saluted by the markets, which didn't make them less inclined to forgive what have been widely interpreted to be disappointing earnings.

To recap the facts: reported net profit was up from $18.7 bn in 2014 to $18.9 in 2015, a meagre increase of 1%, while reported revenue actually was down 2%, from 61.2 to 59.8. The bank also reported losses using its own adjusted profit figures, by over 2% to $20.4bn. Certainly it is no mystery the troubles which Asian markets have suffered from in this torrid year have spilled over to HSBC, however the results fall short of estimates which pointed to net profits of $21 bn, and return on equity, which clocked in at 7.2%, was expected to be 8.4%. The bank claimed that slower trading conditions and credit charges, the results of bad loans issued previously, had a defining negative effect on the Group's earnings. Even though the management majorly highlighted its cost saving drives as a factor impacting the results, operational costs actually increased by 5%: the bank stated that the benefits of the cost savings were only felt in the second part of the year.

The numbers show with utmost clarity how the bank's “pivot to Asia”, to borrow from American presidential rhetoric, has reached an advanced stage: Reported profit before tax was $15.8 bn in Asia ($14.5 bn adjusted profit before tax), and only 0.6 each in Europe and North America each (adjusted profit before tax of $2.4bn and $1.6bn respectively).The group just reinforced its position in mainland China with successful negotiation of a majority stake in a new nationally licensed securities joint-venture, described as a “a landmark opportunity for HSBC to contribute to the development of China’s capital markets”. The group also enhanced its leadership position in facilitating transactions in renminbi, servicing China’s international trade and investment flows as it pursues designs of financial liberalisation and outgoing investment as laid out in the 13th five-year plan.

Profits have also been dragged down by ongoing troubles with bringing its Swiss private banking subsidiary, at the centre of the Falciani scandal, back in line, and by delays in divesting its Brazilian and Turkish operations. Meanwhile, its hiring practices in Asia are being investigated by the SEC, ensuing in delayed staff recruitment and expansion plans.

Notwithstanding its current difficulties, the board has decided to continue with the progressive dividend policy, set at an annual rate of $0.51, maintaining its appeal as a banking income stock. Even if results have been lacklustre, HSBC clearly still has many strengths, and it is perceived as such: its stock slipped 2.71% on the LSE following the results announcement, however it promptly recovered and is now at +5.35%. What is certain is that the company will bet more and more on Asian markets, and particularly on China, to propel its growth. HSBC states as a strategic objective that it is going to continue to focus on the Pearl River Delta as a priority growth opportunity given its concentration of high tech, research focused and digital businesses. Its future will be linked with Asia, for good and bad, indifferently from where its located.

Max Marioni


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