Profits at HSBC Take a Tumble


Europe’s largest bank HSBC (LON:HSBA) has reported tumbling profits in its third quarter results swinging to a $204 net loss. Pre-tax profits fell by 86 per cent to just $842m from $6.1bn last year.

The loss was widely anticipated by the markets. The sale of its Brazilian operations to Banco Bradseco for $5.2bn resulted in a $17bn loss. The Bank also saw profits held back to further retraction costs, US compensation payments and provision for UK PP compensation.

Looking beyond the headline figures the performance was not seen as that bad. The global banking and investment bank division helped in to increase underlying earnings which echoed the performance of other UK banks recent results. Adjusted profits discounting exceptional costs actually came in higher than analyst’s prior consensus, increasing 7% to $5.6bn.

The company also noted an increase in its lenders core capital ratio. This is used as a key measure of the Banks financial strength. The ratio rose to 13.9%, an increase of 1.8% from the end of June. Much of this gain came from changes in the regulatory treatment of it’s investment in China’s Bank of Communications.

However accompanying the latest results was a warning from current Chief Executive Stuart Gulliver.  “UK retail banking profit will be challenging next year” he told Reuters. His comments came on the back of the continued Brexit concerns and the Bank of England’s forecast of lower growth estimates and inflation next year.

The bank has other headwinds to deal with.  Its chairman Douglas Flint is due to leave next year which Stuart Gulliver is set to leave the group in 2019. Replacements for these positions will be difficult to fill.

In addition the Bank has yet to decide as to how it will deal with the governments requirements to ‘ring fence’ it’s UK retail operations from their investment and business arms. The company has yet to decide whether to return to the Midland brand whose operations it took over in 1992 or further expand its popular telephone and online only brand First Direct. This frequently tops customer satisfaction polls.

Shares in HSBC opened up over 4% at the London Open to stand at £6.21.

Outlook

Share in the Bank have moved up strongly in recent months. They now have support at the import £6.00 level.

While the bank won’t have the one off exceptional costs to hold back profits next year, as it’s Chief Executive said, trading conditions are expected to be difficult over the next year.

A binary options contract placed with a broker going long on the results could profit over the medium to longer term. This of course would assume that profits can be maintained. However a Put contract would be the way to play this stock if the economic headwinds prevail.