HSBC: Progress On Strategic Repositioning, But Is It Enough?

HSBC (HBC) has traditionally been viewed as a defensive stock in the banking sector, outperforming in difficult periods but lagging in good times. Since the start of 2011 it has been pursuing a strategic programme to refocus the bank on faster-growing geographies served by efficient global businesses. The business is being shaped around
two key trends: the continuing growth of international trade and capital flows and wealth creation, particularly in faster-growing markets. Ultimately, the aim is to accelerate growth, lower costs and better manage capital. If successful, this will lift earnings and dividends and should help HSBC to throw off the ‘conglomerate discount’ that it has often suffered in the past. Progress with business re-alignment and cost reduction is already clear but economic, market and regulatory uncertainty remains high.

Further progress on strategic repositioning
HSBC wants to be more focused on growing markets with global businesses that have the scale to compete efficiently. The goal is to raise returns to shareholders and the valuation, while improving controls over the business. It has announced 41 business disposals/closures since the beginning of 2011 (eight in Q3) and there have been just three acquisitions of note, as the group exits non-strategic businesses and markets, seeking to focus and simplify its structure. Headcount is down c 10% over the period and a significant amount of capital has been freed up. Progress on the elements of the plan that management can control is clear. It achieved $0.5bn of
annualised cost savings in Q3, taking the total to $3.1bn and management now expects to exceed the top end of its $2.5-3.5bn target range. Meeting the cost:income ratio target (48-52%) will depend on revenue performance and the external economic, market and regulatory environment, which remains challenging.

But progress obscured by accounting noise and exceptionals
Q3 contained more one-off items including disposal gains, own debt revaluation movements, restructuring charges and regulatory/compliance charges –for PPI and interest rate protection products in the UK and for US law enforcement and regulatory matters in the US. Reported Q3 PBT more than halved but the underlying picture continues to show progress on cost control, further improvement in credit quality, a strengthening capital base, and progress on revenue. Adjusted for exceptional items and other notable items identified by HSBC, Q3 PBT increased 150% y-o-y and over nine months is ahead by 41%.

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