Shares in HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) closed down by nearly 4% after the bank published its full-year results yesterday, and HSBC’s share price slipped further this morning.
The bank’s plan to evade the EU bonus cap grabbed most of the headlines, but the underlying reasons for this modest sell-off were twofold: HSBC’s pre-tax profits came in below analysts’ expectations, and the bank missed several of its own, self-imposed targets.
However, as I’ll explain, I think that some of these expectations may have been unrealistic. I still believe that HSBC is one of the best ways to invest in long-term Asian and global growth, while retaining a healthy level of exposure to the UK financial sector.
Mixed story on profits
HSBC’s headline pre-tax profits rose by 9% to $22.6bn last year, but despite this increase, they were around $2bn below analysts’ estimates.
However, it’s worth looking at the different elements that generated this profit boost. Overall revenues fell by 5%, loan impairment charges fell by 30% and operating costs were 10% lower.
Operating profits were up by 16%, and the double whammy of falling costs and a fall in impairments looks good to me.
Missed targets
HSBC reported a further $1.5bn of sustainable cost savings in 2013, taking the annualised total to $4.9bn, since 2011. This helped drive a reduction in the bank’s cost efficiency ratio (the ratio of costs to income) to 59.6%, but this was still significantly higher than the bank’s target of ‘mid-fifties’.
Similarly, HSBC’s return on equity rose by 0.8% to 9.2%, but missed the bank’s target of 12-15%.
Although disappointing, I suspect that these targets were simply unrealistic for such a big bank to achieve so quickly. As a result, I’m not too concerned by these misses, as I believe that HSBC remains well-positioned to benefit from global growth and will continue to manage costs closely.
What about the dividend?
Income investors may have been slightly disappointed by yesterday’s dividend announcement, which confirmed that this year’s interim quarterly payout will remain unchanged at $0.10, leaving shareholders dependent on the fourth quarter payout for any income growth in 2014.
Although this is disappointing, HSBC’s 4.7% trailing yield is already one of the most attractive in the FTSE 100. Combined with an undemanding P/E of 12.3, HSBC’s shares are still a strong buy, in my view, and are at the top of my buy list.