The Motley Fool

2016 in review: HSBC Holdings plc

2016 hasn’t been all that bad for shares in HSBC (LSE: HSBA). The bank started off the year with a series of disappointing earnings as revenues fell and restructuring costs began to weigh on its bottom line. But after a tough start, the bank’s shares perked up in the second half of the year, helped in part by its sizeable exposure to foreign income and steady progress in its restructuring efforts.

Falling earnings

On the surface, HSBC’s financial performance doesn’t look too bad. Adjusted pre-tax profits in the first nine months of 2016 fell by just 6% to $16.7bn. But when we include non-recurring items, such as restructuring costs and a loss from the sale of its Brazilian unit, pre-tax profits fell by a staggering 46% to $10.6bn.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

There were also a few worrying trends as adjusted loan impairment charges (LICs) rose 66% to $2.2bn in the first nine months of the year and revenues fell for its fifth consecutive year. But, there were some positives too — the bank achieved some $2.8bn of annualised cost savings this year, and following the sale of its Brazilian operations, HSBC is on target to reduce its risk-weighted assets by $290bn by 2018.

Falling dividend cover

The tough earnings environment triggered concerns over the sustainability of its dividends. With earnings forecast to fall short of its dividends this year, management is under pressure to improve its underlying profitability. However, the bank will likely struggle to deliver results in short order, as management recently abandoned its medium-term return on equity target of “above 10%”, citing economic uncertainty and slowing growth in its core markets of Britain and Hong Kong.

However, we can’t ignore the fact that HSBC may be able to pay its dividends out of capital for some time, thanks to the recent change in the regulatory treatment of its investment in China’s Bank of Communications. Following this, the bank’s core capital ratio (a key measure of financial strength), rose to 13.9%. That’s a huge improvement from the 12.1% figure reported in June.

Brexit and the weaker pound

The Brexit vote was undoubtedly the most significant event for HSBC shareholders this year, and that’s because of the impact that had on the value of the pound. Given that HSBC earns nearly all of its profits from outside the UK, British investors will no doubt benefit from the much improved sterling translation of these mainly dollar-denominated earnings.

And because HSBC already has a fully licensed subsidiary in France, it’s less exposed to the risk of losing access to the European single market. HSBC should be more concerned about the status of EU nationals working in the UK, given that of the 42,000 staff it has in the UK, about 2,000 are from the EU.

What to watch out for in 2017

Reviewing 2016, I expect the key themes behind 2016 will remain the dominant factors to watch out for next year. After all, Brexit hasn’t even happened yet, and despite recent restructuring progress, HSBC’s earnings outlook remains weak. The bank will likely struggle to meet its cost of capital as it expands in China and the rest of Asia at a time when growth in the region is slowing — and this means HSBC’s dividend concerns aren’t going away any time soon.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jack Tang 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.