HSBC Stock Declines On Q4 Pre-Tax Loss, Restructuring Update

HSBC Holdings (LON:HSBA) (NYSE:HSBC) has recorded a pre-tax loss of $3.9 billion in fourth-quarter 2019 against a pre-tax profit of $3.3 billion reported in the prior-year quarter. The pre-tax loss was primarily impacted by a goodwill impairment charge of $7.3 billion and a U.K. bank levy charge of $1 billion.

During pre-market trading, the company’s shares lost 5% on the NYSE. Probably, the pre-tax loss and the company’s new restructuring plans were the reasons behind the decline. Notably, the actual picture will emerge after the full day’s trading session.

Results were primarily hurt by a rise in expenses. The company’s capital ratios were mixed. Nevertheless, it recorded higher revenues in the quarter.

For 2019, pre-tax profit was $13.3 billion, down 32.9% year over year.

Revenues Improve, Expenses Rise

Adjusted quarterly total revenues of $13.6 billion increased nearly 9% year over year.

For 2019, adjusted total revenues of $55.4 billion increased 5.9% from the previous year.

Adjusted quarterly expenses rose 3.2% from the prior-year quarter to $9.1 billion.

Common equity Tier 1 ratio (transitional) as of Dec 31, 2019, was 14.7%, up from 14% as of Dec 31, 2018. Leverage ratio was 5.3%, down from 5.5% at the end of the previous year.

Restructuring Efforts

With an aim to improve returns over time, the company intends to reduce risk-weighted assets (“RWA”) by more than $100 billion by the end of 2022.

Moreover, supported by a new cost-reduction plan of $4.5 billion, it provided a reduced adjusted cost base of $31 billion or below for 2022.

Return on tangible equity (RoTE) is targeted to be 10-12% for 2022.

Management expects to sustain its dividend and maintain a CET1 ratio of 14-15%. By the end of 2021, the company intends to be at the high end of the range.

Given the restructuring expected to be undertaken over the next two years, HSBC plans to suspend share repurchases for 2020 and 2021.

Yearly Performance by Business Lines

Retail Banking and Wealth Management: The segment reported $6.4 billion in pre-tax profit, down 6.6% year over year. The decline was due to rise in expenses, partly offset by higher revenues.

Commercial Banking: The segment reported pre-tax profit of $4.3 billion, down 44.7% from the prior year. The decline was due to rise in operating expenses, partly offset by higher revenues.

Global Banking and Markets: Pre-tax profit of $1 billion for the segment declined 83.4% from 2018. The decrease primarily resulted from lower revenues and higher operating expenses.

Global Private Banking: Pre-tax profit for the segment was $9 million compared with $248 million recorded in the previous year. The decline resulted from higher expenses.

Corporate Centre: The segment reported pre-tax profit of $1.6 billion against a pre-tax loss of $1.3 billion reported in 2018.

Our Viewpoint

The company’s initiatives to improve market share in the U.K. and China are likely to support financials over the long term. However, these are expected to increase expenses, going forward. Moreover, weak European economy, the impact of Brexit on financials and litigation expenses will likely continue to curb the bank’s near-term growth.

Currently, HSBC carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

UBS Group AG (NYSE:UBS) reported fourth-quarter 2019 net profit attributable to shareholders of $722 million compared with the prior-year quarter’s $315 million. The company’s performance was supported by higher net interest income along with rise in net fee and commission income. Further, decline in expenses was a tailwind.

Marred by significant restructuring costs, Deutsche Bank (NYSE:DB) reported fourth-quarter 2019 net loss of €1.48 billion ($1.64 billion). The results were majorly affected by transformation charges, and restructuring and severance expenses. Also, lower revenues and higher expenses were undermining factors. However, strong capital position and lower provisions were tailwinds.

Itau Unibanco Holding S.A. (NYSE:ITUB) posted recurring earnings of R$7.3 billion ($1.77 billion) in fourth-quarter 2019, up 12.6% year over year. Results display higher revenues, managerial financial margin and a solid balance sheet position. However, elevated expenses and provisions were headwinds.

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