viernes, 7 de noviembre de 2014

viernes, noviembre 07, 2014
Heard on the Street

Road to Good Returns Gets Longer for HSBC

Growing Costs Suggest Bumpy Ride Still in Store for Investors
 
By Paul J. Davies
The good news for HSBC Holdings PLC investors is they can stop worrying so much about revenue growth. The bad news is they should probably fret more about cost growth instead.

The bank admitted Monday it may abandon efficiency targets set just a year ago.

The bank has been doing the right thing in investors’ eyes for the past couple of years by shedding poorly performing and subscale businesses in far-flung corners of the world.

But these efforts at ensuring better long-term returns prompted concerns about where future revenue growth would come from. This year has provided something of an answer.

Commercial banking revenues were 4% better in the first nine months of this year compared with the same part of 2013 helped by growth in lending and higher fees for granting loans.

Management expects this growth to continue on the back of an optimistic view for economic growth in China and the U.K.

Revenues were down 3% in investment banking and trading, but this year has been volatile for HSBC and the industry broadly. The third quarter was better, with trading revenues up 19% over the same period last year, driven by foreign-exchange trading. This business will remain volatile, but HSBC is heading in the right direction again.

The problem, however, is cost growth. Chief Executive Stuart Gulliver admitted the bank is “starting to walk away from” its target of hitting a cost-to-income ratio in the mid-50s percentage range by 2016.

In the third quarter, that ratio was 71.2% and for the first nine months it was 62.5% versus 57.1% in the same period last year. This is a big step in precisely the wrong direction—although HSBC’s ratio is much lower than Citigroup ’s this year and a little better than J.P. Morgan Chase ’s.

But Mr. Gulliver now sees that ratio staying in the low 60s for some time to come. That is a worry for investors.

This is partly caused by increasing staff costs in Latin America and Asia. But most comes from spending on extra legal and regulatory staff and processes as well as penalties and provisions for past misconduct.

There was a fresh $1.63 billion slug of penalties and provisions in the third quarter from its U.S. mortgage settlement, the U.K. end of global foreign-exchange trading investigations and further provisions for U.K. insurance misselling.

As management admits, these sorts of “one-time” charges will continue to recur, probably for the next couple of years. Meanwhile, the extra spending on compliance, stress testing and risk monitoring is a reaction to regulators’ demands and not entirely in management’s control.

It is bad to walk away from targets, but Mr. Gulliver ought to get some credit for acknowledging the problem early. However, it remains hard for investors to separate what part of the compliance expense is investment that will ultimately fall away and what part is running costs that will remain long-term.

Mr. Gulliver insists that the returns available from running a global bank such as HSBC will get better after this period of elevated costs—and HSBC’s return on equity of 9.5% so far this year will be better than that of many rivals. To see the proof of that, however, investors face a longer and uncertain wait.

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