What HSBC Holding plc’s Results Really Meant

HSBC Holding plc (LON:HSBA) is an emerging-markets play.

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hsbc

Banks have been accused of ‘underlyingitis’: producing various versions of their profit figures to tell the story they want to. So I’ve taken to applying my own consistent, judgmental analysis to banks’ income statements, sifting them into two figures: underlying profits — generally, what the banks would like their profits to be; and statutory profits before the fair value adjustment of the banks’ own debt (FVA) — the warts-and-all bottom line. You can follow the links to see my analysis of Barclays‘ and Lloyds‘ results.

To be fair, HSBC (LSE: HSBA) (NYSE: HSBC.US) is not a bad offender and I’ve actually increased its underlying profit figure to place it on a comparable basis. I excluded costs for mis-deeds such as PPI mis-selling and US money laundering fines which I’ve bundled together under the heading ‘litigation’. Hopefully these shouldn’t be a permanent feature.

Here are the last three years’ results for HSBC:

US$m

2011

2012

2013

Underlying profit before tax

15,294

20,421

23,304

Exceptional/one-off items

3,543

9,306

2,010

Litigation

(898)

(3,863)

(1,503)

FVA 

3,933

(5,215)

(1,246)

Statutory profit before tax 

21,872

20,649 

22,565

Statutory profit before FVA 

17,939

25,864

23,811

 Upward trend

There has been a nice upward trend in the underlying result. FVA — HSBC calls it ‘own credit spread’ — is a meaningless accounting adjustment that counter-intuitively represents changes in the market value of the bank’s bonds. It knocked $5bn off HSBC’s results in 2012, and stripping that out you can see that the bottom-line profit actually fell last year.

Indeed, HSBC disappointed the market, failing to meet targets it set itself in 2011. Return on equity was 9.2%, short of a 12-15% target, and cost: income was nearly 60%, well shy of an original target of 48-52% subsequently softened to ‘mid 50s’. But some of that was due to the litigation costs, which is why my underlying figures tell a better story. Since 2011 the bank has made sustainable annual cost savings of $4.9bn, nearly double the bottom end of its target of $2.5-3.5bn.

Emerging markets

That augurs well for the future, and HSBC is poised to enjoy the fruits of an improving global economy. The bank is primarily a play on increasing wealth within emerging markets, and trade between them. 70% of 2013’s profits came from Asia Pacific, with Latin America, the Middle East and North Africa together making more than Europe and North America combined.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

 > Tony owns shares in HSBC and Barclays but no other stocks mentioned in this article.

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