One of the most obvious bombshells in Tuesday’s update to shareholders was the bank’s 62% slide in reported profit before tax to $7.1bn, which it blamed on several one-off charges, including restructuring costs.
While it would be easy to be blinded by the substantial difference in pre-tax profits year-on-year, “the key miss is in the revenue line,” according to Investec Bank. On an underlying basis, revenues for the year were $11.0bn, around $1.3bn (11%) below consensus.
And “just in case the Q4 2016 outturn was not bad enough,” Investec continued, the other short-term revenue headwinds identified by HSBC in the report, including harmful translational effects from FX rates and UK rates, and an “underwhelming” $1bn share buyback announcement are further reason to dump the stock, in its view. It is “a very grim reality” for HSBC, Investec Bank surmised.
As the biggest single constituent of the FTSE 100, HSBC’s 6.7% fall in share price to 664.8p weighed heavily upon the index, dragging it down 0.42% to a low of 7,269 within the first half hour of trading.
The disconnect between the British bank’s share price gains over the past quarter, after the initial shock of the Brexit vote had passed, and its yearly earnings should give investors some pause for concern, said Hargreaves Lansdown senior analyst Laith Khalaf.
“HSBC’s share price has travelled a long way in the last year, while the earnings of the company have actually taken a step back. The bank is a shining example of how the decline in sterling has bumped up the price of some of the UK’s largest companies, without much progress in underlying profits.
“HSBC is the biggest single stock in the FTSE 100, and so millions of people across the UK will have a stake in the bank through their pension or their ISA. The reality is that for these investors the effect of currency translation is real and tangible. Weaker sterling has significantly lifted the value of their shareholding, and the dividends they receive in pounds and pence, and as we know it’s best not to look a gift horse in the mouth,” he cautioned.
Old Mutual Global Investors financials analyst Rob James took the opposite view to Investec Bank’s pessimistic reading of HSBC’s immediate prospects.
Richard Buxton, manager of the Old Mutual UK Alpha fund, has been an enduring backer of HSBC and the bank remains one of his biggest holdings (4.82%) to date.
