HSBC profit disappoints on stock rout as China, Britain weakness poses challenge ahead

HSBC joins rivals including UBS Group AG in reporting earnings hit by the meltdown in stock markets.
HSBC joins rivals including UBS Group AG in reporting earnings hit by the meltdown in stock markets. PHOTO: REUTERS

HONG KONG (REUTERS) - HSBC Holdings posted a disappointing profit growth as higher costs and a stocks rout took a toll on business, while cautioning that a weaker economic outlook for China and Britain would throw up further hurdles this year.

The bank remains alert to the downside risks of the current economic environment, global trade tensions and the future path of interest rates, CEO John Flint said on Tuesday (Feb 19), rounding off his first year at the helm of the company.

Hong Kong shares of HSBC fell as much as 2.7 per cent after the earnings announcement.

An economic slowdown in China, exacerbated by its trade war with the United States, poses a challenge to HSBC's strategy of pouring more resources into Asia where it already makes over three quarters of its profits.

Europe's biggest bank by market value is also being buffeted by headwinds from Britain, which grew at its slowest in half a year in the three months to November as factories suffered from tough global trade conditions and the approach of Brexit.

HSBC reported a profit before tax of US$19.9 billion for 2018, up 16 per cent from US$17.2 billion the year before, but below an average estimate of US$22 billion, according to Refinitiv data based on forecasts from 17 analysts.

It said it would pay a full-year dividend of US$0.51 per share, roughly in line with analysts' expectations. The bank was confident of maintaining the dividend at this level, it said.

 

The bank, however, failed to achieve 'positive jaws' in 2018, a key metric watched by investors which tracks whether the bank is growing revenues faster than costs, for which it blamed the negative market environment in the fourth quarter.

HSBC plans to achieve "positive adjusted jaws" in 2019.

"Despite more challenging market conditions at the end of the year and a weaker global economic outlook, we are committed to the targets we announced in June," Flint said in a statement.

MANAGE COSTS PROACTIVELY

Flint had said in June that HSBC would invest US$15-US$17 billion in three years in areas including technology and China, while keeping profitability and dividend targets little changed.

"We will be proactive in managing costs and investment to meet the risks to revenue growth where necessary, but we will not take short-term decisions that harm the long-term interests of the business," he said on Tuesday.

China's economic growth slowed to 6.6 per cent in 2018, the weakest in 28 years, weighed down by rising borrowing costs and a clampdown on riskier lending that starved smaller, private companies of capital and stifled investment.

HSBC's core capital ratio, a key measure of financial strength, fell to 14 per cent at end-December from 14.5 per cent at end-2017, mainly due to adverse foreign exchange movements.

Its Asia profits grew 16 per cent to US$17.8 billion, accounting for 89 per cent of the group profit.

Since taking over from Stuart Gulliver last February, Flint has largely stuck to the same China-focused strategy as his predecessor while attempting to revive HSBC's ailing US franchise and putting less emphasis on its investment bank.