OREANDA-NEWS. Fitch Ratings says HSBC Holdings plc's (AA-/Stable) earnings for 2014 showed that its ability to generate recurring revenues across regions and products remains strong. However, capital retention, net of dividends, materially slowed to just 42bps of regulatory risk-weighted assets at end-2014. This compares with an average of 90bps in 2004-2013 and is the second-lowest level over that period after having dipped to 35bps in 2008. The performance was affected by a weak fourth quarter in the financial markets-related business, which still accounted for 10% of 2014 group revenues (2011-2013: 9% on average).

HSBC's cost efficiency deteriorated to 67% with settlements and provisions for legal and conduct-related proceedings of USD3.7bn, or 6% of reported revenues. Some of these costs are one offs, but investment in regulatory and compliance-related staff and procedures added another USD2.4bn, or 6% to the adjusted cost base, and this proportion will likely increase further over the next three years. Loan quality has remained benign despite an uptick in related impairments and credit provisions for China-related lending to total 6% of revenues (2013: 9%).

Challenges in leveraging on the global universal banking model and balancing profit across its three major business lines remain. Businesses that have benefitted from the group's global network include corporate lending and payment services, which contributed 17% and 12% (2012: 15% and 10%; 2013: 16% and 11%) to group revenues, respectively, while the contribution from trade finance revenues has remained broadly unchanged at just 6.0% (2012: 5.4%; 2013: 5.7%) of the total. Management estimates that it generates up to 50% of revenues from its global presence.

HSBC's expansion focuses on the US, where commercial lending has grown by 25% since end-2013 and Germany where gross loans grew by 16%. Lending to Greater China also expanded strongly, with Taiwan increasing by 19%, Mainland China by 14% and Hong Kong by 10%. HSBC's reported loans declined by 2% in 2014 while the total balance increased by 3% on a constant currency basis. Risk-adjusted underperformance in Turkey, Brazil, Mexico and the US, as well as parts of the financial markets-related businesses mean these areas will need strategic repositioning.

HSBC's Fitch core capital ratio of 11.7% at end-2014 remains adequate considering the group's capital generation of 100bps gross of dividends in 2014 (2004-2013: 144bps on average). Its reported end-point Common Equity Tier 1 ratio of 11.1% is within the peer group range, but falls short of the 12%-13% level on which HSBC has based its medium-term ROE target of more than 10%. This ROE target has been revised down from a previous 12%-15%. The group's leverage ratio of 4.8% compares well with peers'.

The global markets and banking division's performance was impacted by a USD263m funding fair value adjustment, which caused fourth-quarter losses in the credit and rates activities. Weaker performance in FX was a result of subdued customer activity.

Key cost items included the USD550m settlement reached with the Federal Housing Finance Agency in August 2014, FX-related penalties of USD611m settled in November 2014 and USD550m provisions for on-going investigations. Provisions for UK customer redress programmes and compliance with the UK consumer credit act remain high at USD1.275bn and USD632m, respectively.