HSBC Holdings plc’s (HSBC – Analyst Report) net profit for first-quarter 2015 increased 3% year over year to $5.7 billion. However, earnings came in at 26 cents per share, down marginally from 27 cents earned in the prior year.
At the time of writing this article, ADRs of HSBC declined more than 2% in pre-market trading reflecting investors’ concern about rising expenses. Notably, price reaction during the full trading session will give a better idea regarding investors’ reaction.
Increase in revenues, lower loan impairment charges and absence of any substantial additional legal provision supported the bottom line. However, a persistent rise in operating expenses remains a major concern, raising doubts over the success of HSBC’s cost-saving initiatives.
Performance in Detail (On Adjusted basis)
Profit before tax was $6.9 billion, up 5% from the prior-year level. The rise was mainly attributable to a rise in revenues and lower loan impairment charges, partly offset by higher operating expenses.
Total revenue was $15.4 billion, an increase of 4% from the year-ago figure. The rise was driven by growth in Global Banking and Markets, Global Private Banking, and Retail Banking and Wealth Management segments.
Loan impairment charges and other credit risk provisions (reported) were $570 million, down 29% year over year.
Total operating expenses rose 8% year over year to $8.5 billion. The increase was mainly due to higher staff costs, owing to an increase in staff in customer-facing roles and Regulatory Programmes & Compliance, and a rise in marketing expenditure to support growth.
Cost efficiency ratio (reported) remained stable at 55.7%.
Performance by Business Line
Retail Banking and Wealth Management: The segment reported $1.6 billion in pre-tax profit, down 5% from the prior-year quarter. The decline was due to lower revenues, partially offset by a fall in loan impairment charges and operating expenses.
Commercial Banking: The segment reported pre-tax profit of $2.3 billion, a decline of 6% from the comparable last-year period. The fall was mainly triggered by lower revenues and a rise in loan impairment charges, partly offset by a slight decrease in operating expenses.
Global Banking and Markets: Pre-tax profit for the segment was $3.0 billion, up 6% year over year. The segment’s results improved on the back of a rise in revenues and recoveries in loan impairments, partly offset by higher operating expenses.
Global Private Banking: Pre-tax income for the segment was $65 million, down 68% from $201 million recorded in the year-ago period. The deterioration was a result of higher loan impairment charges and operating expenses, partly offset by growth in revenues.
Other: The segment recorded a pre-tax income of $49 million against a pre-tax loss of $419 million in the year-ago period.
Profitability and Capital Ratios
HSBC’s profitability ratios depicted a mixed bag, while capital ratios remained strong. Annualized return on equity (“ROEâ€) was 11.5%, down from 11.7% as of Mar 31, 2014. Pre-tax return on risk-weighted assets (annualized) grew to 2.4% from 2.3% in the prior-year period.
Notably, HSBC reiterated its target for ROE to more than 10%.
The company’s common equity Tier 1 ratio as of Mar 31, 2015 was 11.2%, down from 11.3% as of Mar 31, 2014.
Our Viewpoint
By disposing unprofitable/non-core operations, HSBC is striving to boost its profitability amid the challenging market environment. The company is poised to benefit from its extensive global network, strong capital position, cost-containment measures, business re-engineering initiatives and solid asset growth.
