The global bank unveils strong results, boosted by booming emerging markets.
HSBC Holdings (LSE: HSBA) -- alias "the world's local bank" -- unveiled a rock-solid set of results for 2011 this morning, driven by its strength in fast-growing markets.
Hiding from the hurricane
Other, more UK-focused banks have reported weak results for 2011, hit by the ongoing crisis in the eurozone. However, HSBC's global reach has allowed it to avoid much of this turmoil, as it continues to focus on the booming economies of the Pacific Rim.
Last year, HSBC's profit before tax leapt 15% to $21.9 billion (£13.8 billion), up 15% on 2010. However, this includes $3.9 billion of 'fair value' gains booked against movements in its own debt. Thanks to a bizarre accounting standard known as FAS 157, when a bank's credit rating reduces and the value of its bonds also falls, it can book this reduced liability as a notional gain.
This is because, in theory, the bank can buy back this debt at below par value in the market, thus reducing its future liabilities. Alas, in the real world, such mark-to-market accounting creates 'phantom profits' that are usually reversed as bank bonds approach maturity. Hence, FAS 157 has attracted much criticism, especially from US regulators and politicians.
Anyway, here's where HSBC made its bumper profits (in $billions):
| Region | 2011 | 2010 | Growth |
|---|
| Rest of Asia-Pacific | 7.5 | 5.9 | 27% |
| Hong Kong | 5.8 | 5.7 | 2% |
| Europe | 4.7 | 4.3 | 9% |
| Latin America | 2.3 | 1.8 | 29% |
| Middle East and North Africa | 1.5 | 0.9 | 67% |
| North America | 0.1 | 0.5 | -78% |
| Total | 21.9 | 19.0 | 15% |
As you can see, $7.5 billion -- more than a third of HSBC's total profits -- came from the Asia-Pacific region, followed by $5.8 billion from Hong Kong. Europe's contribution of $4.7 billion relegates it to third place, but still twice as profitable as Latin America ($2.3 billion).
At just 2%, growth in Hong Kong was relatively weak, versus 27% in the Asia-Pacific, 29% in Latin America and a whopping 67% in the MENA region. Alas, HSBC's disastrous foray into North America in the Noughties continues to haunt the group, with profits collapsing by almost four-fifths (78%) to $0.1 billion in 2011.
As well as checking its geographic strength, it's also worth seeing which of HSBC's divisions performed best. Here they are, again in $billions:
| Global business | 2011 | 2010 | Growth |
|---|
| Commercial Banking | 7.9 | 6.1 | 30% |
| Global Banking and Markets | 7.0 | 9.2 | -24% |
| Retail Banking and Wealth Management | 4.3 | 3.8 | 11% |
| Other | 1.7 | -1.2 | N/A |
| Global Private Banking | 0.9 | 1.1 | -10% |
| Profit before tax | 21.9 | 19.0 | 15% |
Commercial Banking -- lending to businesses -- had an excellent 2011, with profits rising 30% to $7.9 billion. Retail Banking and Wealth Management also improved, growing 11% to $4.3 billion. However, in line with its investment-banking rivals, HSBC's Global Banking and Markets had a poor year, with profits slumping 24% to $7 billion in volatile markets.
A bigger, stronger HSBC
As you'd expect from a bank of its size, HSBC bounced back strongly after the global financial crash of 2007/09. In 2011, its return on equity improved to 10.9%, versus 9.5% in 2010, but below its 2013 target of 12% to 15%.
Also, the mega-bank's earnings per share leapt from $0.73 in 2010 to $0.92 in 2011, up more than a quarter (26%). Another positive was the fall in loan impairment charges: $12.1 billion in 2011, down $1.9 billion on 2010.
However, not all the bank's key performance indicators were positive. Its operating expenses leapt by 10% to $41.5 billion, which pushed up its cost-efficiency ratio to 57.5%, against 55.2% in 2010. This was largely driven by higher staff costs in faster-growing markets, plus $1.1 billion of restructuring costs. Even so, the group will have to take an axe to costs to hit its 2013 target of 48% to 52%.
Also, unlike its UK-based peers such as Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), HSBC is not shrinking its enormous balance sheet. Indeed, in 2011, the bank's total assets grew by $101 billion (up 4%) to nearly $2.6 trillion.
Disappointingly, HSBC's Core Tier One capital ratio went in the wrong direction in 2011, falling to 10.1% from 10.5% in 2010. Nevertheless, this is in the upper half of the group's target range of 9.5% to 10.5%.
Lastly, HSBC took great pains to emphasise the importance of its shareholders. It boasted that it declared $7.3 billion in dividends in 2011, worth $0.41 per share and 14% ahead of 2010. This compares with $4.3 billion of 'variable pay' (read 'after-tax bonuses') paid to employees. Still, shareholders should push for more of the former and less of the latter!
Buy this banking powerhouse
Thanks to its dominance in fast-growing foreign markets, HSBC shrugged off the global downturn and emerged stronger than its UK and US rivals. Nevertheless, the bank continues to reshape itself, closing 16 businesses in 2011 and a further three so far this year.
Looking ahead, HSBC will continue to transform and grow. Right now, Asia, Latin America and the MENA region account for just short of half (49%) of HSBC's revenues. No doubt these three regions will produce the majority of the bank's revenues going forward.
As I write, HSBC shares trade at 561.3p, down 2.4% in a weak London market. This values the group at £100 billion, making it one of the biggest firms in Europe. At this price, HSBC shares trade on a forward price-to-earnings ratio of 9.2 and offer a prospective dividend yield of 4.9%, covered 2.2 times.
There is only one thing to say about these fundamentals: buy this global banking brand today, as it is tough to find such far-reaching strength at such a low price.
> Get the latest on investing and the markets, direct from the desk of David Kuo. You'll also receive a special free report on '10 Steps To Making A Million' if you join The Motley Fool Collective today.
More from Cliff D'Arcy:
