HSBC: Earnings Winner, Financial Loser

NEW YORK ( TheStreet) -- HSBC ( HBC) was the loser among major banking names on Monday, with American depositary receipts sliding 4.5% to close at $55.38.

The broad indices all pulled back slightly, as investors seemed to be digesting last week's flurry of economic news. Investors cheered the announcement of the Federal Open Market Committee last Wednesday that Federal Reserve monetary stimulus policy would remain unchanged, at least until the next FOMC meeting in September.

Then on Friday, the Bureau of Labor Statistics reported nonfarm employment in the U.S. increased by 162,000 jobs during July, with the national unemployment rate falling to 7.4% from 7.6% in June. The number of jobs added during July came in below the consensus estimate of 185,000, among economists surveyed by Thomson Reuters.

The Institute for Supply Management on Monday said its nonmanufacturing index rose to 56% in July from 52.2% in June, with 16 service industries reporting growth, while only two -- Mining and Health Care & Social Assistance -- reported declining activity.

UBS economist Maury Harris in a note to clients on Monday wrote "Payroll gains have averaged 192,000 per month so far this year, up from 183,000 in all of 2012. This pace is more than enough to keep lowering the unemployment rate."

"We continue to expect that the unemployment rate will fall to 7.0% by year end as employment gains remain healthy, albeit moderate," Harris added.

The KBW Bank Index ( I:BKX) was down slightly to close at 66.71, with all but five of the index components showing declines. The index has returned 30% this year, following a return of 30% during 2012.

In the midst of such a strong rally for U.S. bank stocks, investors are having a more difficult time finding bargains. "The large-cap U.S. banks that had been languishing below tangible book value since early 2011 Citigroup ( C), Morgan Stanley ( MS) and Bank of America ( BAC) , all had regained that level by last week," according to KBW analyst Frederick Cannon, who in a note on Sunday suggested investors look to Europe for big-bank stock bargains.

Leaving aside price-to-book ratios and looking further out than usual, TheStreet on Monday identified the five U.S. bank stocks trading cheapest to consensus 2015 earnings estimates. The list is diverse, including large and small banks with differing business models.


HSBC on Monday reported first-half profit attributable to the parent company of $10.284 billion, or 54 cents a share, increasing from $8.438 billion or 29 cents a share, during the first half of 2012. Profit before tax for the first half was $14.071 billion, increasing 10% from $12.737 billion a year earlier.

Net interest income declined to $17.819 billion during the first half from $19.376 billion during the first half of 2012, reflecting the difficult interest rate environment and asset sales, including the company's U.S. credit card portfolio, which was purchased by Capital One ( COF) in May 2012. HSBC's net interest margin narrowed to 2.17% during the first half from 2.37% a year earlier.

Trading income, excluding net interest income from trading activities, rose to $5.230 billion during the first half, from $3.134 billion during the first half of 2012.

HSBC's loan impairment charges and other credit provisions totaled $3.116 billion during the first half, improving from $4.799 billion a year earlier. But the company also said it expected soon to enter a mediation process with the Federal Housing Finance Agency, to settle FHFA claims that HSBC misrepresented the quality of loans underlying private label mortgage-backed securities sold to Fannie Mae ( FNMA) and Freddie Mac ( FMCC) from 2005 to 2008. "Based upon the information currently available, it is possible that these damages could be as high as US$1.6bn," HSBC said.

Total operating expenses were down 13% to $18.399 billion during the first half, from $21.204 billion a year earlier. HSBC's cost efficiency ratio -- essentially the number of pennies of overhead expenses for each dollar of revenue -- dropped to 53.5% during the first half from 57.5% during the first half of 2012. On a constant currency basis and factoring out costs associated with "acquisitions, disposals and dilutions," the underlying cost efficiency ratio for the first half was 55.0%, improving from 62.1% a year earlier.

HSBC in May had detailed a set of specific actions for lowering expenses, including a switch to a single facilities vendor to manage all of its facilities, replacing previous contracts with 1,100 vendors. The company is also working on streamlining its internal reporting and reducing headcount. HSBC had roughly 259,400 full-time equivalent employees as of June 30, declining from 271,500 a year earlier.

The bank said its Basel III Tier 1 common equity ratio was 10.1% as of June 30, leaving it "well positioned with respect to the implementation of Basel III capital standards."

Despite the company's success in growing earnings while lowering expenses, Bank of America Merrill Lynch analyst Alistair Scarff on Monday reiterated his neutral rating on HSBC in a note to clients.

"There is nothing we can see in the latest financial report that undermines the strategic goals of underlying business growth, cost containment and a strong balance sheet," Scarff wrote. "However, we believe the 1H 13 results do highlight that HSBC is a long-dated stock: margins are still falling; overall volumes are not yet growing rapidly enough to deliver stable Net Interest Income. Cost reductions are hard-won and impairment declines not linear."

According to Nomura analyst Chintan Joshi, HSBC's "clean" profit before taxes was $12.8 billion for the first HALF OF 2013, shy his firm's estimate of $12.9 billion. Joshi rates HSBC a "buy."

"HSBC's story is driven by costs and capital in an environment of Asian macroeconomic headwinds," Joshi wrote in a note to clients on Monday. "On a clean basis, costs are developing better than consensus expectations, giving the company operating leverage when revenue trends improve."

"We see the group on track for a high 50s payout ratio for the coming few years," Joshi wrote, while estimating HSBC would achieve a Strong Basel III Tier 1 common equity ratio of 11.5% by 2015.

HBC Chart HBC data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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