HSBC posts pre-tax profit of US$ 20.6 b in 2012

Reuters: HSBC, Europe’s largest bank, pledged to increase its dividend as strong growth in Hong Kong and other core Asian markets boosted its capital even though annual profit fell short of expectations.

The bank on Monday said it made a 2012 pre-tax profit of US$ 20.6 b, down 6% from the previous year and below the average forecast of US$ 22.7 billion from 28 analysts polled by Reuters. Profits were hurt by a US$ 5.2 billion loss on the value of its own debt.

HSBC, already one of the highest dividend payers among Britain’s blue-chip companies, said it plans to bump up its first three interim payouts on 2013 earnings by 11% to 10 cents per share after strong earnings in Asia and the sale or closure of scores of businesses boosted its capital reserves.

HSBC’s shares were down 2.2% at 712 pence in early trade, lagging the benchmark Stoxx Europe 600 Banks Index, which was 0.93% weaker. HSBC’s stock has risen nearly 30% over the past 12 months, outperforming the benchmark’s 9% gain in the same period.

HSBC has closed or sold 47 businesses over the past two years to cut costs, boost profits and manage risk and while it is ahead of schedule on squeezing costs, improving profitability has been more difficult due to a weak global economy and higher regulatory costs.

Return on equity, a key measure of profitability, dropped to 8.4% from 10.9% at the end of 2011, putting it well behind this year’s target of 12-15%.

On an underlying basis, pre-tax profit rose 18% boosted by a strong performance in its commercial banking operation.

HSBC is to increase dividends this year in a show of strength over rivals even though the bank’s annual profits fell after a money-laundering fine and compensation paid to customers.

Europe’s biggest bank is in the last year of a three-year restructuring under Chief Executive Stuart Gulliver, where it has closed or sold 47 businesses and cut 38,000 jobs.

Cutting costs and risks

The bank said this had cut costs and risks and re-established its capital advantage over rivals, opening the door for higher dividends.

“Over the last three or four years we’ve slipped back into the pack and now we’re re-establishing the clear water between HSBC and other banks in terms of being incredibly well capitalised,” Gulliver said.

Already one of the highest dividend payers among Britain’s blue-chip companies, HSBC will bump up its first three interim payouts on 2013 earnings by 11% to 10 cents per share, after lifting its 2012 dividend by 10%, paying out US$ 8.3 billion.

But a weak global economy and increased cost of regulation imposed since the financial crisis has made Gulliver’s other main task of improving profitability more difficult. HSBC’s 2012 pre-tax profit fell 6% to US$ 20.6 billion, below the average forecast of US$ 22.7 billion from 28 analysts polled by Reuters. That put it just behind J.P. Morgan, the top earning bank outside of China. HSBC’s underlying profits rose 18% to US$ 16.4 billion.

Banks around the world have had to adapt to much stricter regulations after the crisis, making it tough to produce the high returns the industry had grown used to.

Gulliver, who took the helm at the start of 2011, said HSBC could still meet a 2013 target for return on equity, a measure of banking sector profitability, of 12-15% even though this fell to 8.4% last year.

“Whilst the operating environment for financial institutions remains difficult, our core business will continue to reap the benefit of recovering economic growth in mainland China and its positive impact on other faster-growing regions,” he said.

HSBC’s annual report, also published on Monday, gave Gulliver top marks for building up capital strength and dividends. But he got a zero for return on equity, cost efficiency and compliance.

The bank was fined a record US$ 1.9 billion in December for anti-money laundering lapses in the US and Mexico which Gulliver called ‘shameful’.

He is hoping a more streamlined structure will ensure risk and compliance are better managed across a bank that spans 80 plus countries and 60 million customers.

The scandals that have emerged since the crisis have increased pressure to restrain risk-taking and excess in sector, prompting the European Union’s cap on bonuses.

Gulliver said it was too early to assess the impact of the EU rules and said he needed to discuss them with investors.

HSBC has said it could leave Britain with Hong Kong seen as the most likely alternative if regulations become too onerous. The bank reviews the location of its headquarters every three years, but delayed a decision last year due to the global regulatory uncertainty.

“It doesn’t put moving back to Hong Kong back on the agenda at this stage, as we haven’t reached the stage at which anything is on the agenda,” Gulliver said.

HSBC said its bonus pool shrank to US$ 3.7 billion last year from US$ 4.2 billion in 2011. Gulliver was paid 7.4 million pounds (US$ 11.1 million), down from eight million for 2011.

Some 314 staff earned US$ 529 million in 2012, or an average of US$ 1.7 million each. It said 204 employees earned over one million pounds last year, including 78 in Britain. The bank regards bonuses as having more flexibility and scope to claw back pay.

“The results have been slightly disappointing from an earnings perspective,” analyst at Shore Capital Gary Greenwood said. “This time last year people were disappointed with its capital position but during the year it resolved that.”