2015 is already shaping up to be a bad year for HSBC (LSE: HSBA) (NYSE: HSBC.US). Indeed, even though year is only a few weeks old, HSBC’s shares are trading within a few pence of a two-year low.
And there could be further declines to come as HSBC tries to deal with regulators, fight off an impending credit crisis within Asia and maintain its capital position.
Rising costs
Regulators are the biggest threat facing HSBC during 2015. The rising cost to banks like HSBC of dealing with regulators demands has been well documented, and these costs are holding HSBC back.
Costs are now increasing within HSBC’s compliance and legal division at a rate of around 25% per annum. As a result, the bank’s cost income ratio has been pushed in to the high 50s, away from the previously targeted mid-50s target, undoing work to keep costs low over the past five years.
There’s also the cost of ring-fencing to consider. UK’s new ring-fencing regime is designed to protect taxpayers from future financial crises. This means large banks such as HSBC must separate high-street branch operations from investment banking activities by 2019. HSBC’s management has stated that ring-fencing will cost the bank £1bn to £2bn.
On top of all this, analysts at Morgan Stanley now believe that HSBC is facing up to $7.7bn in additional fines for wrong-doing between now and 2016.
At a time when HSBC is trying to increase its capital cushion, fund a hefty dividend payout and grow profits, these rising costs and additional fines will tie the bank down.
Falling profits
To get an idea of how much HSBC is likely to be affected by rising regulatory costs, you only need to look across the pond to the US. For example, over the past week three of the world’s largest banking giants, Citigroup, J.P. Morgan & Co. and Bank of America have all reported fourth-quarter results, and all missed analysts’ expectations.
In particular, Citigroup reported a 86% decline in fourth quarter profit. Bank of America reported an 11% decline and J.P. Morgan’s fourth quarter income declined 7%. All three blamed the declines on rising costs and fines.
These are concerning figures. Even though HSBC is the second largest bank in the world, it is not immune from rising costs and increased competition. What’s more, unlike many of its peers, HSBC pays out around half of its profits in dividends. Peer Santander used to follow a similar approach but the Spanish bank has recently been forced to slash the payout to preserve capital.
The bottom line
All in all, things don’t look good for HSBC. Costs are rising across the banking sector putting margins under pressure and the bank is likely to see its profitability decline over the next few quarters.
Falling profits could put the bank’s dividend under pressure and this would push the share price down further.
