US Edition HSBC
678p -33.1p
Questor says Hold
For a bank unveiling pre-tax profits of $19bn (£12bn), more than all Britain's other major banks combined, you might have thought the market could have shown a bit more gratitude, but instead HSBC was one of the largest fallers in the blue-chip index yesterday. That's investor expectations for you.
Since the financial crisis of 2008, banks have broadly been put into two camps: the winners and those that survived (many with government support). HSBC is emphatically in the former category and as such is judged to a higher standard than its state- and sheikh-backed rivals.
This, as yesterday showed, has its advantages and disadvantages.
While Barclays' new chief executive Bob Diamond wowed analysts with a show of brute "Bobtimism" earlier this month, earning the bank's shares an immediate uplift, Stuart Gulliver, HSBC's new boss, went out and rained on all their forecasts.
Where analysts had expected profits of $20bn in 2010 with a consensus estimate for this year of $25bn, Mr Gulliver had to disappoint on both counts.
Unveiling a new return on equity target range for the bank, Mr Gulliver eschewed the optimism of Mr Diamond, and said the bank hoped to make a return of 12pc to 15pc, down from a previous range of 15pc to 19pc.
This more pessimistic outlook for HSBC is based on its guess that new regulation, in particular higher capital requirements, is going to materially change the earnings capability of banks, in particular large, globally important ones like itself that could be subject to even tougher rules than those that will be applied to smaller rivals.
For HSBC this is unlikely to mean a massive rights issue, though the bank pointedly did not rule out smaller capital raisings, but will more likely mean more of its earnings in coming years going to shore up its capital ratios, rather than into the shareholders' pockets.
At the same time, the bank's cost of doing business seems to be rising steadily. The cost to income ratio increased from 52pc in 2009 to 55.2pc last year - in the second half the figure hit 58pc - which Mr Gulliver said was "unacceptable". In May HSBC will explain how it intends to get this number down to 52pc, but until then investors were left to digest two things: firstly, that any cost-cutting programme will take at least two to three years, and, secondly, that a highly competitive market for staff in Asia and other emerging regions means the bank will have little room in the near future to bring down its people costs, which represent just over half of total expenses.
HSBC should be credited for its frank and conservative outlook, but it is also hard to see why a bank that already commands a premium valuation - it trades at 1.8 times tangible book - should trade any higher.
With a high dividend yield of 3.9 and a forecast price earnings multiple for 2011 of 11.2, HSBC looks like a good hold. The shares were tipped on June 20 last year at 648p and are now 5pc higher. The FTSE 100 is up 13pc over the same period.
It is true that Asia offers fantastic earnings opportunities, but there are cheaper ways to gain that exposure and with European recovery priced so cheaply at the moment – Lloyds barely trades at book value – now is not the time to be buying into what could well be the next asset price bubble.