Fitch: HSBC's 4Q Loss Shows Headwinds for Asia Pivot
OREANDA-NEWS. The drop in HSBC Holdings' (AA-/F1+/Stable) ROE to 7.2% in 2015 against its own benchmark of above 10% shows that implementing its strategic plan to focus on Asia, cutting costs and selling off poorly performing assets is going to be challenging and take longer, Fitch Ratings says. This is particularly as China's economic growth decelerates, commodity markets slow and interest rates remain low.
The reported USD858m pre-tax loss reflects an ongoing burden from conduct, legal, regulatory and redress charges, which amounted to USD707m in 2015, and USD743m in costs associated with the implementation of its refined strategy. The loss also reflects USD773m in fair-value losses on its own debt. Adjusted for these and other non-recurring items, pre-tax profit was USD1.9bn in 4Q15, which was 34% lower than in 4Q14. For 2015, pre-tax profit was USD20.4bn, 7% lower than in 2014.
Headwinds in the quarter came from unusually high loan impairment charges, which were mainly driven by the collective assessment of oil and gas exposure and affected the commercial banking operations in Canada, UAE and Indonesia. Impairments on mortgages rose due to the re-assessment of collateral in the UAE and higher delinquencies in Brazil. However, Fitch believes that HSBC's overall loan quality remains sound with impairments of just 39bp on gross loans. The key concentration and area to watch remains China, where reported drawn exposures stood at USD143bn at end-2015, of which Guangdong loans accounted for USD4.3bn (2014: USD4.1bn). The China exposure far exceeds oil and gas-related risks of USD29bn and exposure to the metals and mining sector of USD19bn.
HSBC will face significant challenges in achieving revenue growth that is faster than cost growth well into 2016 and likely in 2017. The increase in adjusted revenue in 2015 (0.9%) continues to lag the rise in adjusted costs (4.6%). This resulted in the gap, known as "jaws" in the banking industry, remaining negative at -3.7% (9M15: -4.1%, 1H15: -2.9%).
An indication of the benefits from its international network are HSBC's reliable transaction banking revenues, which grew by 4% to USD15.7bn in 2015, accounting for 26% of the group total. Revenues from business synergies increased by 6% to USD11.6bn, or 19% of reported revenue. In addition, all three key markets contributed materially to outbound revenues, with US customers contributing 23% to revenues booked elsewhere in the organisation, European operations 35% and Asia 31%.
Retained earnings net of dividends generated only 31bp of risk-weighted assets (RWA) in 2015, which is the lowest capital contribution since 2004 as calculated and tracked by Fitch. HSBC's regulatory end-point common equity Tier 1 ratio of 11.9% at end-2015 (9M15: 11.8%) still compares well with peers and will move into the 12%-13% target range once the sale of its operations in Brazil are completed in 1H16. Capitalisation benefits from RWA reductions of USD124bn as a result of discipline in scaling down legacy assets in its global banking and markets business and the sale of its stake in China's Industrial Bank in 2Q15. HSBC's leverage ratio at 5.0% remains solid.
Implementing total loss absorbing capacity (TLAC) requirements will further challenge HSBC's profitability with management estimating annual interest expenses of up to USD800m. The bank will start issuing TLAC securities in 2016 exclusively from the top holding company until there is more clarity on the US authorities' and other key regulators' rules.
The bank's strongest markets in 2015 with reported profit before tax of at least USD500m were Hong Kong (USD9.8bn), Mainland China (USD3.1bn), India (USD606m), France (USD639m), Singapore (USD507m) and Saudi Arabia (USD500m). Mainland China stands out with HSBC's own operations for the first time exceeding USD1bn while associates contributed USD2bn. Loss-making countries include the UK due to head office-related charges that offset the strong pre-tax profit increase at HSBC's operating UK subsidiary, Switzerland, Indonesia and Turkey. HSBC's decision not to sell and restructure its activities in Turkey in the absence of an acceptable offer is sensible but it will occupy management time and weigh on profitability.
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