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HSBC
HSBC announced record profits for the year to December although a bit behind market expectations. The world’s second largest bank announced a 35% increase in pre-tax profit for the year, but only just met forecasts, disappointing the market that had expected a stronger performance. Operating profit before provisions was up 24% to $24,712m ($19,990m in 2003). Group pre-tax profit was up 35% to $19,426m ($14,401m in 2003).
HSBC’s growth this year was driven by a strong performance in personal lending (predominantly property lending). Pre-tax profits in personal lending grew 46% to $9,044m. Corporate credit growth was generally muted except in Asia, South America and the Middle East where economies benefited from better commodity prices. Pre-tax profits in corporate and investment banking were up 26.7% to US$5,196m and commercial banking pre-tax profits were up 21.5% to US$4,169m.
Lower demand for credit lead to excess liquidity in the market putting further pressure on interest margins, although this was offset by better volume growth. Overall interest margins have shrunk from 64% last year to 61.7% in 2004.
Fee income was in line with the first hafl of the year, driven sales of investment products and insurance in Asia, better trade-related revenues in Asia, credit card fees and account services fees. Dealing profits were good but not as impressive as H1 due to lower volatility in markets and weaker bond activity due to rising interest rates.
The cost/income ratio is reported has deteriorated marginally (to 51.3% from 51.1% last year), which was blamed on changing business mix and increased regulatory and legal requirements (the introduction of International Accounting Standards in 2005, the Basel 2 risk-capital framework, and preparation for Sarbanes-Oxley reporting in 2006).
The the outlook for next year is likely to be challenging, given that growth in 2004 was driven by personal lending (particularly against property) we expect lending growth to slow as the economy cools
. HSBC’s wide geographic spread of operations is a strength. While narrowing margins and a deterioration in the cost/income ratio need to be watched these are problems expected at this stage of the business cycle and and do not point to any fundamental weakness in the bank. Medium term prospects are still good but the shars trade at a 12x prospective PE: at the top end of the sector range. The yield is attractive at 4.8%
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