LONDON (Alliance News) - HSBC Holdings PLC Monday reported a decrease in first half pretax profit that was worse than analysts expected, with the banking group continuing its efforts to replace revenue from businesses it has sold or discontinued.
HSBC is in the second stage of a strategy to streamline the group, having sold off or exited 74 businesses since 2011. It is cutting costs and increasing returns and dividends to shareholders. It has also highlighted its trade and receivables finance, payments and cash management, foreign exchange, and renminbi services as areas in which it wants to invest over the next three years.
In a statement, HSBC said it made a USD12.34 billion pretax profit in the six months ended June 30, compared with USD14.07 billion in the corresponding period last year. A group of 15 analysts polled by the bank had forecast on average a USD12.46 billion pretax profit in the first half. The miss came as revenue fell by 9% to USD31.17 billion, while operating expenses came down by 0.7% to USD18.27 billion. Loan impairment charges, a bright spot, fell to USD1.84 billion from USD3.12 billion, ahead of consensus forecast of USD1.96 billion.
Earnings came under pressure due to a combination of pressure on the bank's investment banking division, Global Banking and Markets, which was hurt by low market volatility and client activity, as well as a drop in Retail Banking and Wealth Management underlying revenue due to the run-off of its higher yielding consumer mortgage lending portfolio, though its commercial and private banking divisions saw increases in pretax profit.
Regionally, HSBC experienced reduced pretax profit in Asia and Europe, which are its two largest earnings generators, as well as in Latin America, more than offsetting increases in the Middle East and North America. Last year's interim results also included higher gains from disposals and reclassifications.
Chairman Douglas Flint said the result was also influenced by heightened regulatory scrutiny of the sector, which has led to banks having to undertake significant changes in their approach to business in order to meet domestic and international demands.
"At a time of residual concerns over the sustainability of economic growth in many major markets and with heightened geopolitical tensions apparent, the board supported management's view that this was not the time to expand risk appetite to offset the effect of lower revenues arising from business disposals and legacy portfolio run-off," Flint said in a statement.
HSBC cautioned on the pressure of preparing for the ring-fencing of its investment banking and retail banking activities, which it expects to cost hundreds of millions of dollars a year, amid the Competition and Markets Authority's recommendation of an in-depth market investigation into the UK retail banking sector.
And Flint also said that regulators' activities have had an effect on individuals and their business decisions, citing a trend of people in the network selling the simplest products because of "uncertainty ... around the standards to which people are going to be held."
"Greater focus on conduct and financial crime risks at all levels of the firm globally is clearly the right response to past shortcomings. There is, however, an observable and growing danger of disproportionate risk aversion creeping into decision-making in our businesses as individuals, facing uncertainty as to what may be criticised with hindsight and perceiving a zero tolerance of error, seek to protect themselves and the firm from future censure," Flint said.
Past shortcomings were evident in HSBC's results, as it booked USD234.0 million in relation to UK customer redress programmes, such as the mis-selling of payment protection insurance. Earnings also included a USD367.0 million provision following a review of compliance with the Consumer Credit Act in the UK, due to shortcomings in statements sent to customers. Under the Act, HSBC is required to send annual statements to fixed term loan customers in the personal loan space in order to remind them that they are able to repay the loan at a faster rate. While the bank failed to send the reminders, it did inform customers of the ability to make the payments at the time the loans were made.
Despite HSBC's troubles, Chief Executive Stuart Gulliver has one eye on the future, in which he expects the UK to maintain a "firm recovery" while the bank has slightly increased its forecasts for mainland China gross domestic product (GDP) growth in 2014 and for export growth to benefit Hong Kong. However, he said that growth in Latin America remains muted, while the Middle East business, although performing well, is "overshadowed by regional uncertainties." That said, the CEO was more optimistic on the prospect of rising interest rates.
"There are indications that interest rates could start to rise as early as the fourth quarter of 2014 in the UK and the first half of 2015 in the US, which given the size of our commercial surplus has positive implications for our revenues," Gulliver said.
HSBC left its interim dividend at USD0.20.
HSBC shares were Monday quoted up 2.8% at at 646.60 pence.