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HSBC: H1 Results
HSBC unveiled stronger than expected earnings figures for the half year to June 2005. Pre-tax profits rose 5% over the same period last year to reach US$10,640m, ahead of market expectations of US$9,200m-US$10,400m.
The growth was lead by the expansion of personal financial services and commercial banking businesses in new and emerging markets, particularly North America, as well as the smaller markets of South America and the rest of the Asia-Pacific (outside Hong Kong).
The acquisition of Household in the US helped boost earnings in North America; net profits in the region grew by 8.7% to US$3,713m. The bank’s two other major markets, Europe and Hong Kong, turned in weaker performances with net profits declining by by 2.8% and 7.3% respectively.
The Banks’ profits in Europe were affected slowing consumer markets in the UK which resulted in increased levels of bad debts. Interest rates in Hong Kong have risen (squeezing margins) and accounts for the weaker performance there. Overall interest margins have weakened from 59% to 55%.
Net profits in the rest of the Asia-Pacific grew by 32%, while profits in South America more than doubled. The rest of the Asia-Pacific contributes 12% of HSBC’s net profits while South America accounts for 3.2%. The main markets contribute as follows: North America (35%), Europe (27%), Hong Kong (23%).
In terms of business unit, personal financial services contributed the bulk of the growth, net earnings in this business grew by 20.6% in the half year. Commercial banking also performed well, with net earnings growing by 9.1%.
Profits in investment banking declined by 17.6%, which the company says is due to high ‘investment costs’ in building business volumes in the unit which has been in existence for only two years. Costs in the investment bank rose 24% but revenue from the unit was up just 3.6%. The bank says future cost growth will be slower as marketing spend eases.
Overall costs seem to be under control with the cost income ratio flat at 48.5%, amongst the best in the industry.
Shrinking margins and rising bad debts are a problem faced by most UK banks but HSBC is less affected by these factors due to its wide geographic spread. The company is looking to the Americas and Asia for growth and its recent acquisitions in the US and Mexico have performed well. Further expansion is expected in Brazil, Turkey, the Middle East, India and South Korea. The bank is well managed, solvency is good, the only niggling concern is with its underperforming investment banking unit which, despite heavy investment, is yet to reach the top of the league tables.
The share trades at 932p, on a prospective PE of 13x (2005 earnings) at the upper end of the sector range with a yield of 4.4%.
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