Thud.
That’s the sound of the HSBC’s annual report and accounts hitting the FT Alphaville desk — all 397 pages of it. (Download at your peril.)
Clearly, we haven’t had time to read all of it, but here are our initial thoughts.
A couple of things stand out and explain Monday’s negative share price reaction — at pixel time shares in HSBC are down 31.6p at 679p.
First, there’s a new return on equity target of 12-15 per cent, which is disappointing versus a previous target of 15-19 per cent.
And second, an equally disappointing rise in costs. These are 5 per cent above consensus, according to Citigroup, with the Global Banking and Markets business the culprit.
Assuming equity T1 of 9.5%-10.5%. Lower ROE due to higher regulatory costs. They are assuming full impact of B3 rules will hit equity T1 by 2.5-3.0% vs B2 which looks very high (we’d assumed 1.5-2.0%). On 2010 FY results: $19.1bn PBT exc FVO is 3% below consensus. Revenues $68.2bn is in line with consensus and Citi estimates. Similarly impairments of $14.0bn is in line with consensus and Citi. Costs are the miss: $37.7bn +5% vs cons. All divisions slightly below our estimates: GBM looks light due to higher costs, ditto at a regional level Europe.
While here’s Nomura:
Group indicates expected CT1 range of 9.5-10.5%, but that regulatory change will lower current ratios by 250-300bp by 2019. This implies it will have to continue to build capital internally, in-line with our assumptions, but not suggesting capital surplus, as some have expected.
Cut RoE target to 12-15% from the previous 15-19%. This equates to target normalised EPS of USD 0.95 and USD 1.2 in 2011 terms. We believe the company should be able to meet the low end of the target range, but would view the top end as demanding.
Hmm. That’s a big Basel III hit — even for a conservative bank like HSBC.
Still it’s not all bad news, says Bruce Packard of Seymour Pierce:
Management comments that higher costs of regulation will depress returns for the entire industry. Consequently they have reduced their RoE target to 12-15% in the future (currently 9.5%). Also they have set a maximum advances-to-deposits ratio for the Group of 90%.
The stock is up 11% since the start of the year. We would not see the reduced RoE target or disappointment in Markets division as a negative given that investors have been sceptical of the earnings quality in these divisions. We would be more nervous that the entire industry is investing in staff at a time when the revenue outlook is uncertain. That said, HSBC’s 55% cost income ratio is not flattered by leveraging the balance sheet, the conservative loans to deposit ratio ought to result in a higher premium relative to banks with a more aggressive balance sheet structure…
Worth remembering — not least as aggression comes back in fashion.
Related link:
Britain’s banks on the (upward) turn – FT Alphaville