9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 31 st July 2012. HSBC HOLDINGS PLC ( 滙豐控股 ) Sector : Banking Group Chairman : Douglas Flint HKSE Code : 00005 Market Price : HK$65.65 (31/07/2012) Group Chief Executive : Stuart Gulliver Shares Issued : 18,255.17m Group Finance Director : Iain Mackay Mkt. Cap. : HK$1,198,451.91m 52 weeks Hi/ Lo : HK$70.998 / HK$53.854 HSI : 19,796.81 (31/07/2012) Main Business : Banking and related financial services SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2012 Interim Results Highlights US$ million Vs 1H2011 (%) Vs 31/12/2011 (%) Net interest income 19,376-4.2% Non-interest income 17,521 +13.3% Total operating income 36,897 +3.4% Operating expenses (21,204) +3.4% Operating profit before impairment losses 15,693 +3.4% Impairment losses on loans and advances (4,799) -8.9% Profit before taxation 12,737 +11.0% Taxation (3,629) +112.0% Attributable profit to ordinary shareholders 8,152-8.7% Total loans 992,202-6.1% +3.6% Total deposits 1,278,489-3.1% +2.0% Total assets 2,652,334-1.4% +3.8% Basic EPS (US$) 0.45-11.8% 1st & 2nd interim DPS (US$) 0.23 +9.5% Selected Ratios 1H2012 1H2011 FY2011 Net interest margin 2.37% 2.54% 2.51% Cost-income ratio 57.5% 57.5% 57.5% Return on average asset 0.70% 0.70% 0.65% Return on average equity 10.5% 12.3% 10.9% Impaired loan ratio 4.11% 4.18% 4.34% Impaired advances coverage 42.3% 42.4% 42.1% Loan-deposit ratio 77.6% 80.1% 76.4% Core tier 1 ratio 11.3% 10.8% 10.1% Total capital ratio 15.1% 14.9% 14.1% 1H12 net profit missed market expectations HSBC Holdings ( HSBC ) recorded a net profit for ordinary shareholders of US$8,152m for 1H12, down 8.7% y-o-y, below market consensus of US$8,438m. Key negatives were weak revenues and higher-than-expected taxes. These were cushioned by positive surprises to provisions and contributions from Chinese associates. Another positive was the bank s core tier 1 ratio, which increased to 11.3%, thanks to HSBC s disposals in the US. The results also included several one-off items, consisting of charges of US$1.3bn in the UK for customer mis-selling, charges of US$0.7bn in the US for anti-money laundering, gains of US$3.8bn from disposal of US cards and retail branches and losses on its own debt of US$2.2bn. Net interest income fell 4.2% y-o-y Interest income fell 4.8% y-o-y as yield curves continued to flatten and interest rates remained low. HSBC s net interest margin also decreased 17bps y-o-y to 2.37% in 1H12. The reduction in the available-for-sale debt security portfolio as a result of disposals 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.
also led to lower interest income. The decline in interest income was partly offset by lower interest expense, notably in relation to debt issued by the Group. This reflected a net reduction in average balances outstanding, largely in the US. Non-interest income rose 13.3% Net fee income decreased by 5.6% y-o-y, mainly driven by the disposal of the Card and Retail Services business in the US. Broking income was 24.2% lower, notably in Hong Kong and Europe, reflecting reduced transaction volumes as a result of weaker investor sentiment. Separately, HSBC reported a valuation loss on its own debt liabilities of US$2,170m (valuation losses of US$143m in 1H11), due to the adverse movement in credit spread. Nevertheless, gains of US$3,807m on disposal of the aforesaid US branch network and cards business helped offset the above negatives and lifted the overall non-interest income. Cost cutting continued Compared with the first half of 2011, HSBC s average staff numbers fell by 5% and it recorded a net reduction of more than 16,700 full-time employees compared with the end of 2011. However, operating expenses still increased by 3.4% y-o-y, owing to some notable cost items. These included additional provisions of US$1,345m which were raised in respect of the estimated redress for the possible mis-selling in previous years of PPI policies (US$1.0bn) and interest rate protection products (US$237m). It also included provisions of US$700m related to US anti-money laundering. Improving asset quality Loan impairment charges and other credit risk provisions decreased from US$5,266m to US$4,799m, a decline of 8.9% compared with the first half of 2011. Improvement was seen in the Commercial and Mortgage Lending (CML) portfolio in North America. This was partly offset by the increased loan impairment charges in Latin America, mainly in Brazil, as well as in Rest of Asia- Pacific and the Middle East and North Africa. HSBC s total NPL ratio improved slightly to 4.11% at end-june 2012 from 4.34% at end-2011. Capital base remains solid HSBC s core tier-1 CAR and total CAR changed from 10.1% and 14.1% at end-2011 to 11.3% and 15.1% at end-june 2012, respectively. The improvement was driven by profit generation and a reduction in risk weighted assets following the business disposals. In respect of Basel III changes, Management estimated that applying the increased capital requirements which will come into effect on 1 st January 2013 would lower the core tier-1 CAR it by 100bps to 10.3%. Business Review by Business Lines Pre-tax profit by businesses Breakdown (US$ million) 1H2012 1H2011 y-o-y (%) 1H2012 1H2011 Retail Banking and Wealth Mgt 6,410 3,126 +105.1% 50.3% 27.2% Commercial Banking 4,429 4,189 +5.7% 34.8% 36.5% Global Banking and Markets 5,047 4,811 +4.9% 39.6% 41.9% Global Private Banking 527 552-4.5% 4.1% 4.8% Other (3,676) (1,204) +205.3% (28.9%) (10.5%) Total 12,737 11,474 +11.0% 100.00% 100.00% Retail Banking and Wealth Management (RBWM) reported profit before tax of US$6,410m, compared with a US$3,126m in the first half of 2011. The improvement mainly resulted from a number of strategic transactions, including US$3.1bn following completion of the disposal of the US Card and Retail Services business and US$449m on completion of the sale of 138 of the 195 non-strategic branches in the US, as well as gains from the disposal of its operations in Thailand (US$108m), the Private Client Services business in Canada (US$75m) and the general insurance business in Argentina (US$57m). Commercial Banking (CMB) reported profit before tax of US$4,429m, 5.7% higher than that of 1H11. The increment included the gain of US$212m from the sale of non-strategic branches in the US and US$35m from the disposal of its general insurance business in Argentina. Global Banking and Markets (GBM) reported profit before tax of US$5,047m, 4.9% higher than in the first half of 2011 as a result of higher revenues in a number of businesses (e.g. Rates, Foreign Exchange, Payments and Cash Management and Balance Sheet Management), offset in part by a rise in operating expenses and higher loan impairment charges. GBM recorded notable growth in fastergrowing markets, with revenues rising by 15% in Hong Kong, 17% in Rest of Asia-Pacific and 17% in Latin America in the first half of 2012. Global Private Banking (GPB) recorded pre-tax profits of US$527m in 1H12, lower than US$552m in 1H11. The lower brokerage fee income and increased operating expenses dragged the overall earnings. 2
Other Businesses reported loss before tax of US3,676m (compared with a loss of US$1,204m in 1H11), attributable to the adverse fair value movements of US$2.2bn on HSBC s own debt. Business Review by Geographies Pre-tax profit by geographic areas Breakdown (US$ million) 1H2012 1H2011 y-o-y (%) 1H2012 1H2011 Europe (667) 2,147-131.1% -5.2% 18.7% Hong Kong 3,761 3,081 +22.1% 29.5% 26.9% Rest of Asia Pacific 4,372 3,742 +16.8% 34.3% 32.6% Middle East and North Africa 772 747 +3.3% 6.1% 6.5% North America 3,354 606 +453.5% 26.3% 5.3% South America 1,145 1,151-0.5% 9.0% 10.0% Total 12,737 11,474 +11.0% 100.00% 100.00% Europe (-5.2% pre-tax profit) HSBC s European operations reported a pre-tax loss of US$667, compared with a profit of US$2,147m in the first half of 2011, due to the change in credit spreads on HSBC s own debt held at fair value. On an underlying basis, pre-tax profits decreased by 55% due to higher operating expenses as a result of a rise in customer redress provisions. Hong Kong (29.5% pre-tax profit) HSBC s Hong Kong operations posted a 22.1% y-o-y increase in pre-tax profit. US$ million Vs 1H2011 (%) Net interest income 2,599 +15.6% Non-interest income 3,534 +11.7% Total operating income 6,133 +13.3% Operating expenses (2,396) +2.4% Operating profit before provisions 3,737 +21.5% Impairment losses on loans & advances (32) +28.0% Pre-tax profit 3,761 +22.1% Vs 31/12/2011 Total loans 165,740 +4.7% Total deposits 318,820 +1.1% Total assets 486,608 +2.9% Selected Ratios 1H2012 1H2011 Net interest margin^ 2.00% 1.86% Cost-income ratio 39.1% 43.2% 30/6/2012 31/12/2011 Impaired loan ratio 0.33% 0.38% Impaired advances coverage 96.58% 96.19% Loan-deposit ratio 51.99% 50.18% ^ For the Hong Kong operations of The Hongkong and Shanghai Banking Corp only. In 1H11, Hong Kong operations recorded pre-tax profit of US$3,761m or up 22.1% y-o-y. Net interest income grew by 15.6% y-o-y, notably in RBWM and CMB, driven by wider deposit spreads and growth in balances of both customer loans and deposits. Net fee income was broadly unchanged as higher credit fee income was offset by a reduction in brokerage income from lower market turnover. The overall non-interest income was lifted by the gain of US$275m from the sale of shares in Axis Bank Limited and Yes Bank Limited, two non-strategic investments in India. Operating expenses increased by 2.4% y-o-y to reflect wage inflation across the business and higher performance-related costs in GBM. Cost-to-income ratio improved to 39.1%, down from 43.2% a year earlier. Loan impairment charges and other credit risk provisions increased by 28.0% y-o-y from a low base in 1H11. The credit environment remained stable and impaired loan ratio further improved to 0.33% as of 30/06/2012, from 0.38% as of 31/12/2011. 3
Rest of Asia Pacific (34.3% pre-tax profit) Rest of Asia Pacific recorded a 16.8% y-o-y increase in pre-tax profit, reflecting strong growth in lending and deposit balances, coupled with improved liability spreads. Share of profit from associates and joint ventures increased by 15% to US$1,588m, driven by higher profits from BoCom as a result of loan growth and wider spreads. However, profits from Ping An were lower as increased income from the banking business following the consolidation of Shenzhen Development Bank was more than offset by lower securities broking and underwriting income. Reported profits also included gains from the sale of its RBWM business in Thailand of US$108m, its GPB business in Japan of US$67m, and its interest in a property company in the Philippines of US$130m. Middle East and North Africa (6.1% pre-tax profit) reported pre-tax profit of US$772m, up 3.3% y-oy, thanks to the 13% increase in contribution from associates. In respect of HSBC s own operation, the modest revenue growth in challenging market conditions and lower costs from the implementation of strategic restructuring programmes were mostly offset by higher loan impairment charges. North America (26.3% pre-tax profit) reported a pre-tax profit of US$3,354m in 1H12, up 453.5% y- o-y. The reported profits included gains in the US of US$3.1bn and US$661m following the completion of the sales of the Card and Retail Services business and the 138 non-strategic branches, respectively, On an underlying basis, the profit before tax was only US$21m compared with US$483m in the first half of 2011. This decrease was mainly due to lower revenue in CML, reflecting a reduction in average lending balances as the business winds down. Latin America (9.0% pre-tax profit) reported a pre-tax profit of US$1,145m compared with US$1,151m in 1H11. The increased revenue in Brazil and Argentina following growth in average lending balances was offset by the loss of US$135m recognized following the reclassification of its non-strategic business to held for sale. Outlook & Prospects Capital is HSBC s key strength HSBC s core tier 1 ratio reached 11.3% at end-june 2012 from 10.1% at end 2011, partly due to the release of US$39bn risk-weighted assets through disposal of Card and Retail Services. With the implementation of Basel III in January 2013, the ratio will be lowered by 100bps to 10.3%, still 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 is likely to be stable and will gradually increase in the medium term. Cost management was strong Since May 2011, HSBC achieved US$1.7bn of sustainable cost savings, including US$0.8bn in the first half of 2012 or US$2.7bn annualized. Average head count fell 5% y-o-y in 1H12. The underlying cost (ex-uk customer redress and US law enforcement charges of US$2.0bn for 1H11) was down 6% y-o-y which drove down cost-to-income ratio to 52%. We believe the 48%-52% cost-to-income ratio can be achieved in 2013. Management also reiterated its expectation that it can achieve its ROE target of 12%-15% for 2013. These figures would imply upgrades for HSBC. Awaiting legal clarity Management did not provide any indication of timing or total costs regarding the US anti-money laundering legal case, only stating that US$0.7bn was its current best estimate. However uncertainty over this issue is likely to persist in the near term until the investigations are concluded. Valuations HSBC is trading at 8.9x 12E P/E and 0.92x 12E P/B, which represents a premium among pan-european banks, but is trading at a discount to Standard Chartered s 10.7x and 1.38x, respectively. HSBC s surplus funding, strong balance sheet and exposure to emerging markets will continue to drive improving returns and we see HSBC as defensively positioned within the sector with 10.3% fully loaded Basel III ratio. Though the regulatory issues may remain an overhang in the near term, they will clear ultimately, allowing the improving underlying story to show through. We accordingly recommend an accumulate rating on the banking counter. Recommendation: Accumulate 4
Appendix I I. Impairment provisions of HSBC Holdings As % of total customer advances Individual allowance Portfolio allowance Non-performing loans As of 30/6/2012 0.67% 1.06% 4.11% As of 31/12/2011 0.68% 1.15% 4.34% As of 30/6/2011 0.59% 1.18% 4.18% II. Comparison of HSBC Holdings loan book: 30/06/2012 vs 31/12/2011 Loans-by economies 30 th Jun, 2012 Up/(down) 31 st Dec, 2011 US$ million US$ million Europe 450,638 +2.5% 439,578 Hong Kong 165,740 +4.7% 158,246 Rest of Asia Pacific 130,335 +4.6% 124,650 Middle East & North Africa 29,669 +7.5% 27,589 North America 160,789 +7.2% 149,928 Latin America 55,031-5.0% 57,949 992,202 +3.6% 957,940 III. Breakdown of loan book of HSBC Holdings Breakdown of Loan Book as of 30/6/2012 Total customer advances: US$992,202 million North America 16.2% Latin America 5.5% Europe 45.4% Middle East & North Africa 3.0% Rest of Asia Pacific 13.1% Hong Kong 16.7% 5
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