HSBC (LSE: HSBA), formerly the world’s local bank, issued its Q4 and full-year 2016 results yesterday and the figures made for grim reading. Overall, the group reported an 82% drop in annual net profits, blaming one-off items including multibillion dollar writedowns in Switzerland and Brazil. Return on equity — a key measure of profitability — fell to 0.8%, far below management’s target of 10% and to try and boost margins it expanded its cost-cutting target from $4.5bn-$5bn to $6bn. It’s expected that this additional cost rationalisation will add an extra $2bn in restructuring costs on top of the $4bn already taken.
This isn’t the first time HSBC has disappointed. The group has struggled to meet expectations since the financial crisis, and I don’t believe this trend will end anytime soon.
Even though shares in the group have risen more than 70% since Brexit, these gains seem to be built on sand. The bank’s Hong Kong-listed shares, which haven’t benefitted from sterling’s devaluation, are up 30% over the past year, excluding dividends.
Stay away
As HSBC continues to struggle, I’m personally avoiding the bank. Even though the group offers a solid dividend yield of 6.1% at the time of writing, I believe there are just too many headwinds facing the bank at this point.
For example, originally management had planned to shrink its investment bank and redeploy $150bn of assets into Asia. Now, this redeployment target has been reduced to $80bn-$90bn as Asia’s growth slows. What’s more, after disposing of 96 businesses over the past decade, the bank is now back on the acquisition trail. As HSBC has a patchy record of success with acquisitions, this is arguably not the best strategy for the struggling lender.
Overall, with profits falling and headwinds to the business growing, I’m avoiding HSBC.
Costs rising, revenues falling
Royal Mail‘s (LSE: RMG) red letter boxes are one of the most recognisable landmarks in the UK, but while these boxes have stood the test of time, Royal Mail is struggling to adapt to the modern world.
The company is caught between a rock and a hard place with mail volumes falling, competition rising and costs such as pensions increasing. Operating profit before transformation costs for the six months to 25 September fell 5% to £320m from £342m. Royal Mail is now seeking cost savings of £600m a year, up from a previous target of £500m.
Even though shares in Royal Mail trade at an attractive forward P/E of 10.1, City analysts don’t expect the business to grow at all over the next three years. Pre-tax profits are expected to come in at £558m for the year ending 31 March this year and to fall to £533m for the year ending 31 March 2019. Earnings per share are set to remain steady over the same period. Based on these figures, the shares deserve to trade at a low earnings multiple.
All in all, considering the company’s sluggish growth, despite Royal Mail’s attractive dividend yield of 5.6%, I’m avoiding the company for the time being.
