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February 25, 2014

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HSBC’s 9% rise in annual profit comes in below market hopes

Source: Agencies | February 25, 2014, Tuesday | Print Edition

HSBC missed market expectations with a 9 percent increase in annual profit and warned of greater volatility in emerging markets this year.

HSBC, which is based in London but made two-thirds of last year’s profit in Asia, has axed more than 40,000 jobs and sold or closed 60 businesses over the past three years to cut costs, but has not yet reached its cost efficiency and profitability targets.

“Having made good headway in pulling out of low-quality businesses, they are now facing the headwinds of emerging markets,” said Chris Wheeler, an analyst at Mediobanca.

“It’s not a disaster, but they are paddling hard to make any progress.”

HSBC said it increased its bonus pool for staff by 6 percent to US$3.9 billion last year, and lifted CEO Sturat Gulliver’s pay, including salary and bonuses, to 8 million pounds (US$13.4 million) from 7.5 million pounds.

The increase comes despite pressure on banks to rein in big bonuses that many blame for fueling the risk-taking that led to the 2008/2009 financial crisis.

HSBC said it would start paying 665 top staff a new quarterly allowance — either in cash or deferred shares — effectively lifting the amount of their fixed pay to meet a new European Union law capping bonuses at 200 percent of salary.

Gulliver said major shareholders supported the plan, but that the EU rules had made pay structures more complex and he hoped the UK government will be successful with a legal challenge to the move.

“We had a compensation plan here that the shareholders liked but sadly because of the EU directive we’ve had to change. This isn’t something we would have wanted to do... It’s much more complicated,” Gulliver said on a conference call.

Under the new structure, senior bankers will be guaranteed more pay, but the maximum they can get will be cut. Gulliver will be guaranteed 4.2 million pounds, up from 2.5 million before, and can earn up to 11.4 million pounds, down from 13.8 million.

Gulliver is under pressure to show how HSBC can replace income lost from the sale of US businesses and a stake in a Chinese insurer, and worries that Asia’s economic growth is slowing.

He remained optimistic about longer-term prospects for emerging markets, which have been hit hard by a US decision to wind down stimulus measures, but warned of “greater volatility in 2014 and choppy markets”.

He predicted China’s economy would grow by 7.4 percent this year, Britain’s by 2.6 percent, the US by 2.5 percent and western Europe 1.2 percent.

HSBC posted 2013 pretax profit of US$22.6 billion, up from US$20.6 billion in 2012 but below the average forecast of US$24.3 billion in a Thomson Reuters poll.

Shutting businesses hit the bank’s revenues, which fell 5 percent. Stripping out the impact of disposals, underlying revenue was US$63.3 billion, up from US$61.6 billion.

HSBC said it continued to build up capital, while it remained unclear how much it would need to hold under global and UK rules. It will pay a final 2013 dividend of 19 cents per share, up on 2012 but less than expected by analysts.

“There is some degree of prudence and caution until we get greater clarity on the capital management framework for the banking sector in Europe and the UK,” said Finance Director Iain McKay.

The bank’s common equity ratio improved to 10.9 percent at the end of December from 9.5 percent a year earlier. But it said changes by the UK regulator would cut 0.35 of a percentage point off that ratio this quarter.

HSBC has said it could buy back shares to use excess capital, but Gulliver said that would not happen this year.

 

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