9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 6 th August 2013. HSBC HOLDINGS PLC ( 滙豐控股 ) Sector : Banking Group Chairman : Douglas Flint HKSE Code : 00005 Market Price : HK$85.10(06/08/2013) Group Chief Executive : Stuart Gulliver Shares Issued : 18,642m Group Finance Director : Iain Mackay Mkt. Cap. : HK$1,586,434m 52 weeks Hi/ Lo : HK$90.00 / HK$62.96 HSI : 21,923.70 (06/08/2013) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2013 Interim Results Highlights US$ million Vs 1H2012 (%) Vs 31/12/2012 (%) Net interest income 17,819-8.0% Non-interest income 16,553-5.5% Total operating income 34,372-6.8% Operating expenses (18,399) -13.2% Operating profit before impairment losses 15,973 +1.8% Impairment losses on loans and advances (3,116) -35.1% Profit before taxation 14,071 +10.5% Taxation (2,725) -24.9% Attributable profit to ordinary shareholders 9,998 +22.6% Total loans 984,943-0.7% -2.8% Total deposits 1,316,182 +2.9% -1.8% Total assets 2,645,316-0.3% -1.8% Basic EPS (US$) 0.54 +20.0% 1st & 2nd interim DPS (US$) 0.28 +21.7% Selected Ratios 1H2013 1H2012 FY2012 Net interest margin 2.17% 2.37% 2.32% Cost-income ratio 53.5% 57.5% 62.8% Return on average asset 0.80% 0.70% 0.60% Return on average equity 12.0% 10.5% 8.4% Impaired loan ratio 3.87% 4.11% 3.81% Impaired advances coverage 40.8% 42.3% 41.7% Loan-deposit ratio 74.8% 77.6% 75.7% Core tier 1 ratio 12.7% 11.3% 12.3% Total capital ratio 16.6% 15.1% 16.1% 1H13 earnings weaker than expectation HSBC Holdings ( HSBC ) recorded a pre-tax profit of US$14,071m for 1H13, up 10.5% y-o-y, falling short of the market expectation of US$14.6 billion. The weakness of the results is driven by tepid revenues amid continued margin compression and shrunken loan portfolio. On the other hand, provisions surprised on the higher side due to some oneoff items in Brazil and Mexico. These were partly cushioned by better cost control, which led to a sustainable improvement in cost-to-income ratio. Another positive was the bank s core tier 1 ratio, which increased to 12.7% as at-june 2013. HSBC s dividend payout was raised to US$0.28, up 21.7% y-o-y. The dividend payout ratio was maintained at 52%, around the same level as last year. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.
Net interest income Net interest income dropped 8.0% y-o-y, mainly attributable to non-core businesses sold during 2012 and the first half of 2013. The run-off of the Consumer Mortgage and Lending (CML) portfolio in the US and the consumer finance business in Canada also contributed to the decline. On the other hand, HSBC s net interest margin decreased 20bps y-o-y to 2.17% in 1H13, reflecting the sale of the higher yielding Card and Retail Services (CRS) business, and lower yields on its surplus liquidity. Non-interest income Net fee income was largely stable at US$8,404m, up 1.2% y-o-y. The growth was mainly due to a 37% y-o-y rise in underwriting fee, thanks to the increased demand for equity and debt capital financing in Europe and Hong Kong. Fees from unit trusts and funds under management grew 40% and 8% respectively, reflecting improved market sentiment and strong customer demand. These factors were partly offset by the sale of the CRS business, which led to a reduction in cards and insurance fee income. Other non-interest income fell 12% y-o-y to US$US$14,300m as the gains on disposal of US branch network (US$661m) and US card business (US$3,148m) in 1H12 did not repeat in 1H13. Stripping out the disposal gains, other non-interest income should have risen 17.4% y-o-y, boosted by 40% y-o-y growth in net trading income. Operating expenses HSBC s operating expenses fell 13.2% y-o-y to US$18,399m, primarily resulting from cost-savings due to the business disposals during 2012, including the CRS business and the nonstrategic branches in the US. Costs also fell due to the non-recurrence of a provision for US antimoney laundering (US$700m) and a reduction of US$901m in UK customer redress programmes. HSBC s cost cutting plan continued in 1H13, which reported a US$0.8bn cost-savings from its ongoing organisational effectiveness programmes. This, together with business disposals, resulted in a fall of 8% in average staff numbers compared with the first half of 2012. Asset quality Loan impairment charges and other credit risk provisions decreased notably by 35% y- o-y to US$3,116m. The fall mainly came from North America whose loan impairment charges (LICs) was down by 68% y-o-y to US$696m, thanks to the improvements in housing market conditions, a reduction in lending balances of CML and lower delinquency levels. Nevertheless, LICs in Latin America jumped by 34% y-o-y to US$1.4bn, owing to the impairment model changes and assumption revisions in Brazil for the restructured loans, as well as change in housing policy in Mexico. HSBC s NPL ratio deteriorated slightly to 3.87% at end-june 2013 from 3.81% at end-2012. Capital position HSBC s core tier-1 CAR and total CAR improved from 12.3% and 16.1% at end-2012 to 12.7% and 16.6% at end-june 2013, respectively. Under Basel III requirement, HSBC s common equity tier 1 ratio of 10.1% at 30 th June 2013 remained one of the best capitalized banks in the world. Business Review by Business Lines Pre-tax profit by businesses Breakdown (US$ million) 1H2013 1H2012 y-o-y (%) 1H2013 1H2012 Retail Banking and Wealth Mgt 3,267 6,410-49.0% 23.2% 50.3% Commercial Banking 4,133 4,429-6.7% 29.4% 34.8% Global Banking and Markets 5,723 5,047 +13.4% 40.7% 39.6% Global Private Banking 108 527-79.5% 0.8% 4.1% Other 840 (3,676) NA 6.0% (28.9%) Total 14,071 12,737 +10.5% 100.00% 100.00% Retail Banking and Wealth Management (RBWM) reported profit before tax of US$3,267m, compared with a US$6,410m in the first half of 2012. The decrease mainly resulted from the nonrecurrence of gains on sale of US CRS business (US$3.1bn), 138 branches in the US (US$449m) and the absence of profits from Ping An (disposal of shares in December 2012). Excluding the disposal items, profit before tax should have increased by US$2.0bn y-o-y, driven by lower loan impairment charges for the US run-off CML portfolio, improvements in housing market conditions and improved delinquency levels. Commercial Banking (CMB) reported profit before tax of US$4,133m, 6.7% lower than that of 1H12. The drop was largely due to the effect of the disposal of US branches in 2012 and lower profit from associates following the reclassification of Industrial Bank in 2013. Global Banking and Markets (GBM) reported profit before tax of US$5,723m, 13.4% higher than in the first half of 2012 as a result of higher revenue, including a US$451m favourable debit valuation adjustment (DVA) on derivative contracts, and lower impairment charges. 2
Global Private Banking (GPB) recorded pre-tax profits of US$108m in 1H13, significantly lower than US$527m in 1H12. The reduced earnings were attributable to the reclassification of its private banking operation in Monaco to held for sale, resulting a loss of US$279bn in 1H13. Other Businesses reported profit before tax of US$840m, compared with a loss of US$3.7bn in the first half of 2012. The turnaround was attributable to the non-recurrence of a US$700m provision for US anti-money laundering investigations in 1H12. In addition, HSBC recognised a net gain of US$553m on disposal of Ping An shares, together with foreign exchange gains of US$442m relating to sterling debt issued by HSBC. Business Review by Geographies Pre-tax profit by geographic areas Breakdown (US$ million) 1H2013 1H2012 y-o-y (%) 1H2013 1H2012 Europe 2,768 (667) NA 19.7% -5.2% Hong Kong 4,205 3,761 +11.8% 29.9% 29.5% Rest of Asia Pacific 5,057 4,372 +15.7% 35.9% 34.3% Middle East and North Africa 909 772 +17.7% 6.5% 6.1% North America 666 3,354-80.1% 4.7% 26.3% Latin America 466 1,145-59.3% 3.3% 9.0% Total 14,071 12,737 +10.5% 100.00% 100.00% Europe (19.7% pre-tax profit) HSBC s European operations reported a pre-tax profit of US$2,768m, compared with a loss of US$667m in the first half of 2012. The profit turnaround was due to a decrease in charges relating to customer redress programmes as well as a favourable DVA on derivative contracts. Hong Kong (29.9% pre-tax profit) HSBC s Hong Kong operations posted an 11.8% y-o-y increase in pre-tax profit. US$ million Vs 1H2012 (%) Net interest income 2,866 +10.3% Non-interest income 3,777 +6.9% Total operating income 6,643 +8.3% Operating expenses (2,418) +0.9% Operating profit before provisions 4,225 +13.1% Impairment losses on loans & advances (46) +43.8% Pre-tax profit 4,205 +11.8% Vs 31/12/2012 Total loans 190,066 +9.2% Total deposits 342,664-1.0% Total assets 528,712 +2.0% Selected Ratios 1H2013 1H2012 Net interest margin^ 1.92% 2.00% Cost-income ratio 36.4% 39.1% 30/6/2013 31/12/2012 Impaired loan ratio 0.23% 0.27% Impaired advances coverage 92.15% 99.16% Loan-deposit ratio 55.47% 50.28% ^ net interest margin of the Hongkong and Shanghai Banking Corp which included operations in Hong Kong and the Rest of Asia Pacific In 1H13, Hong Kong operations recorded pre-tax profit of US$4,205m or up 11.8% y-o-y, on the back of stronger revenue growth, driven by increased net fees from unit trusts & debt issuance, and balance sheet growth. LICs jumped 43.8% y-o-y in 1H13, from a very low base in 2012, due to a revision to the assumptions used in collective assessment models in RBWM, partly offset by collective impairment releases in CMB. Overall asset quality remained benign with no signs of 3
material deterioration. Its impaired loan ratio even improved further to 0.23% as of 30/06/2013, from 0.27% as of 31/12/2012. Rest of Asia Pacific (35.9% pre-tax profit) Rest of Asia Pacific recorded a 15.7% y-o-y increase in pre-tax profit. However, excluding the net gain of US$553mn on the sale of Ping An stake and the reclassification of Industrial Bank as a financial investment, the pre-tax profit in Rest of Asia Pacific was largely flattish y-o-y in 1H13. In respect of its Mainland operation, HSBC had 148 HSBC outlets, 21 HSBC rural bank outlets and 46 Hang Seng Bank outlets as of 30 th June 2013. Middle East and North Africa (6.5% pre-tax profit) reported pre-tax profit of US$909m, up 17.7% y- o-y, thanks to the strong growth in Gulf Co-operation Council (GCC) economies, including Saudi Arabia, Qatar, Oman, UAE etc., during 1H13. However, growth was much weaker outside the GCC, particularly in Egypt, where political unrest restricted economic activity, widened the budget deficit and put severe pressure on the currency. The outlook for Egypt remains highly uncertain. North America (4.7% pre-tax profit) reported a pre-tax profit of US$666m in 1H13, down from US$3,354m in 1H12 due to one-off gains from the sales of the CRS business and the 138 nonstrategic branches. On an underlying basis, the pre-tax profit amounted to US$808m in 1H13 compared with a pre-tax loss of US$772m a year earlier, mainly due to lower loan impairment charges in the US. Latin America (3.3% pre-tax profit) reported a pre-tax profit of US$466m compared with US$1,145m in 1H12. The lower earnings were attributable to the spike in loan impairment charges, resulting from impairment model changes and assumption revisions for restructured loan portfolios in Brazil. Impairments also rose in Mexico as a result of a change in the public housing policy together with a specific exposure in GBM, Outlook & Prospects Lacking Near term momentum HSBC s interim results disappointed market in two aspects. Firstly, income momentum remained tepid and was only boosted up by trading income. HSBC is likely to struggle in terms of revenue growth given the slowdown in Asian economy, especially China and Hong Kong. Secondly, a spike in ILCs in certain regions, especially Europe and Latin America, hit investors nerves. Despite HSBC said that these were one-off circumstances, the signs of worsening asset quality may create a medium overhang to HSBC s share prices. More positive on medium term Following 2-year restructuring programmes, HSBC s cost cutting plan and reorganization story have largely been priced in. The next catalyst for HSBC s stock prices will require higher interest rates, which help widen its net interest margin. Given the rising likelihood of the tapering off of Quantitative Easing (QE) by the US Federal Reserve, HSBC is poised to gain in the medium term. Nevertheless, the near-term environment is still likely to be challenging for HSBC to grow its revenue. Capital is HSBC s key strength HSBC s core tier 1 ratio reached 12.7% at end-june 2013 from 12.3% at end 2012. Under Basel III requirement, the ratio was lowered to 10.1%, but still remained one of the best capitalized banks among global peers. The ratio was at the top end of HSBC s target of 9.5%-10.5% and above the required potential regulatory requirement of 8%-9.5%. As a result, we believe dividend payout ratio of 50% is likely to be stable and will gradually increase in the medium term. Valuations HSBC is trading at 11.4x 13E P/E and 1.2x 13E P/B, which represents a premium among pan-european banks. Its valuations even caught up Standard Chartered s 10.1x 13E P/E and 1.2x 13E P/B. HSBC s surplus funding, strong balance sheet and well-diversified exposure to both emerging and developed markets will offer investors a stable dividend play in the medium term. We continue to recommend an accumulate rating on the banking counter. Recommendation: Accumulate 4
Appendix I I. Impairment provisions of HSBC Holdings As % of total customer advances Individual allowance Portfolio allowance Non-performing loans As of 30/6/2013 0.69% 0.89% 3.87% As of 31/12/2012 0.65% 0.94% 3.81% As of 30/6/2012 0.67% 1.06% 4.11% II. Comparison of HSBC Holdings loan book: 30/06/2013 vs 31/12/2012 Loans-by economies 30 th Jun, 2013 Up/(down) 31 st Dec, 2012 US$ million US$ million Europe 438,777-6.4% 468,761 Hong Kong 190,066 +9.2% 174,086 Rest of Asia Pacific 140,037 +0.8% 138,865 Middle East & North Africa 29,615-0.9% 29,880 North America 139,536-4.7% 146,372 Latin America 46,912-15.9% 55,771 984,943-2.8% 1,013,735 III. Breakdown of loan book of HSBC Holdings Breakdown of Loan Book as of 30/6/2013 Total customer advances: US$984,943 million North America 14.2% Latin America 4.8% Europe 44.5% Middle East & North Africa 3.0% Rest of Asia Pacific 14.2% Hong Kong 19.3% 5
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