Why HSBC Holdings plc’s Falling Profit Is Good News

There is no denying that some shareholders were disappointed with HSBC’s (LSE: HSBA) (NYSE: HSBC.US) first-quarter results.

Indeed, the bank revealed that during the first three trading months of 2014, pre-tax profit dropped 20% year on year, while revenues fell 8% to $15.9bn. On the face of it, the bank’s management blamed, “challenging market conditions” for the drop in profitability, one-off charges relating to restructuring were also blamed. 

However, HSBC’s profits and revenues are actually taking a hit as the bank ‘de-risks’ itself and this is great news for shareholders.  

Quality not quantityHSBC

Essentially, HSBC’s de-risking is the bank’s attempt to ensure long-term growth and stability for itself and shareholders.

For example, during the past few years the bank has pulled out of several key markets, which has hit revenue but also made the bank safer. In particular, the bank has pulled out of Bahrain, Jordan and Lebanon as high costs and competition saps profitability. Additionally, after being fined for a money laundering scandal within Mexico, HSBC has closed some Latin American operations.

Further, the bank has made changes to the way its staff sell products to customers. Staff are now no longer paid on a commission basis but on “balanced scorecard” of performance targets. Once again, this change has hurt sales but HSBC’s relationship with clients has improved.

Meanwhile, across the pond, HSBC has shrunk its US mortgage loan portfolio, which at one point stood at $118bn but is now worth less than $30bn. Of course, reducing the bank’s loan portfolio has dented interest income but HSBC’s balance sheet is now stronger and the bank is less exposed to the US property market.  

Cutting costs, boosting profits

HSBC’s profits are also coming under pressure as the bank foots the bill for its cost-cutting programme. Still, over the long term, these cost cuts should improve margins and drive profits higher.

For full-year 2014 the bank expects to cut its cost base by $2bn to $3bn, $275m of cost cuts occurred during the first quarter.

Just to give some kind of reference to how drastic this cost-cutting plan is, HSBC’s cumulative dividend payout only cost the company a total of $6.4bn for 2013. So, if the bank reduces costs by up to $3bn per annum, there is scope to increase the dividend payout by around 50%.

Foolish summary

So all in all, HSBC’s plan to cut costs, reduce risk and boost profits is great news for investors. Indeed, as HSBC cuts its exposure to risky assets and widens its profit margins, investors can rest safe in the knowledge that the bank won’t disappear overnight. 

Nevertheless, the banking sector remains a challenging sector to analyse. However, bank's like HSBC with dividend yields over 4% could help you to boost your portfolio returns and make 2014 an even stronger year for your portfolio.

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Rupert does not own any share mentioned within this article.