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Are HSBC Holdings plc’s Results Cause For Caution?

HSBC Holdings (LSE: HSBA)(NYSE: HSBC.US) released first-quarter figures on today, and the market responded with a 13p (2%) fall to 633p by midday. It’s not hard to see why.

While adjusted revenue was up 4% over the first quarter of 2014, to $15.4bn, leading to a 5% rise in adjusted pre-tax profit to $6.98bn, that was soured by a $483m (6%) rise in operating expenses. At the bottom line, quarterly earnings per share dropped from 27 cents a year ago to 26 cents, and the dividend for the period was held at 10 cents. Return on equity fell slightly, which is also worrying.

Back on track?

The quarter was significantly better than the final quarter of 2014, and the City’s forecasts for a 20% rise in EPS for the full year may well come good — HSBC’s Q4 last year was truly dreadful, so a decent final period this year would make a big difference, but it would only get the bank back to where it was in 2013.

And this is at a time when some of the other major banks, ones which were more seriously troubled by the worldwide crisis, are looking at significantly more upbeat prospects — Barclays, for example, saw EPS rise healthily last year while HSBC’s was falling, and there are rises of 36% and 21% forecast for this year and next.

The question in my mind is whether HSBC is sufficiently lean and efficient to compete well in today’s changed banking environment, and I fear it might not be. The banking crunch did a lot of harm, but one good thing that came out of it was a forced restructuring of the most badly affected banks, leading to cost-saving efforts that have made a significant difference.

Too top-heavy?

HSBC’s enormous worldwide spread concerns me, too, and it must be harder for the firm’s overall board to see what it’s many subsidiaries are up to. Allegations of misconduct at the company’s Swiss arm, including accusations that the bank helped some of its wealthier clients to evade tax, presumably came as a shock.

Whether HSBC’s structure as a parent holding company, in control of many semi-independent world wide banks, makes it nimble enough for the rest of this century is an open issue — and we still have no idea how the worldwide group might react to a Chinese slowdown (though, thankfully, that has yet to materialize).

With the Q1 results, group CEO Stuart Gulliver told us that “We continue to work on initiatives to deliver cost-savings over the remainder of 2015 and beyond“, and I think that’s going to be the crucial thing to watch for HSBC over the next five or so years — and it might not be so easy for the behemoth to achieve.

There are better prospects

For me, my money would be with the banks that have already been through the pain and are heading out of it — I find Barclays and Lloyds Banking Group in particular a good bit more attractive right now.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.