Will Falling Profits Threaten HSBC Holdings plc’s Dividend?

HSBC (LSE: HSBA) (NYSE: HSBC.US) released its first-half results this week and the results missed City expectations. Indeed, during the first half, revenue fell 4% to $31.4bn and pre-tax profit fell 12% to $12.3bn.

A 12% fall in pre-tax profit is a large, and worrying decline but does this mean that the bank’s dividend payout is now under threat?

Rising costsHSBC

HSBC’s management blamed the bank’s falling revenue on a number of factors. The bank has pulled out of a number of markets recently and reduced its exposure to risky assets, so naturally, revenues have shrunk accordingly. Since 2011 HSBC has disposed of or exited 74 businesses with almost $100bn risk-weighted assets.

However, the bank is also struggling with rising costs and falling investment banking income, as employees shy-away from taking risks. In particular, HSBC’s investment banking income fell 12%, to just over $5bn during the first half of the year, while costs actually rose 2%. 

Management has blamed increasing regulation for higher costs as the bank has been forced to take on additional staff to manage compliance. Over 10% of HSBC’s global workforce now works in compliance. Unfortunately, with revenue falling and costs rising, HSBC’s profit margins are coming under pressure.

Dividend debate

With profits being squeezed, there have been some concerns that HSBC’s dividend payout will be cut, in order to preserve cash. However, it seems as if, for the time being at least, HSBC’s dividend payout is safe, based on the bank’s capital ratio and dividend cover. 

For example, at the end of the first half of this year, HSBC had a solid capital ratio of 11.3% under Basel III rules. A capital ratio of 11.3% is more than required by regulators and indicates that the bank will not have to raise additional capital anytime soon.

Furthermore, during the first half of 2014 HSBC reported earnings per share of $0.50 and paid out a dividend per share of $0.20. So, according to these figures the bank’s dividend payout is currently covered two-and-a-half times by earnings per share.

Even City superstar Neil Woodford has come out in support of HSBC’s dividend recently. HSBC now accounts for around 2% of Woodford’s new income fund.

Nevertheless, as some analysts have recently pointed out, HSBC’s share price has fallen 12% over the past year. This decline is more than double the value of dividends paid out over the same period. For long term dividend investors however, this decline is nothing to worry about.

What to do now?

Whether you buy, sell or hold HSBC following this news is up to you. However, I strongly suggest you research the banking sector further before making any trading decision.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.