Is HSBC Holdings plc’s Profit Too Good To Be True?

HSBC Holdings’ (LSE: HSBA) (NYSE: HSBC.US) performance has been impressive during the past few years as the bank has reaped the benefits of Asia’s rise as the worlds economic powerhouse.

However, some City analysts now believe that HSBC could be sailing into stormy waters as China’s economic growth slows. There are also some acquisitions being made that HSBC has been too optimistic when reporting results and underlying figures are actually worse than management is letting on. 

Trouble brewing in Asia

Unfortunately, it would appear as if there is trouble brewing in Asia, as growth within the region’s largest economy, China begins to slow. It is likely that slowing Chinese growth will hit HSBC’s own growth.

In particular, during recent weeks, a number of Chinese companies have collapsed under unsustainable debt piles built up over the past few years. These bankruptcy’s follow comments from the Chinese government, which has stated that it will no longer back-stop and provide emergency credit to badly run, over leveraged companies. As a result, some analysts are now concerned that a wave of bankruptcies and defaults could be about to hit the Chinese economy.

HSBC is also facing pressure here within the UK and the US, as the threat of further regulation of taxes hang over the company. 

Impressive results

Still, there is no doubt that HSBC’s full-year 2013 were nothing short of impressive, following on from an impressive performance during 2012. Indeed, HSBC reported a jump in pre-tax profit of 9% to $22.6 bn for 2013, while adjusted profit exploded 41% to $21.6bn.

Further, City analysts as well as HSBC’s management expect the bank to repeat this good performance during the next two years. Specifically, estimates current predicted that the bank’s pre-tax profits will jump 14% during 2014 and then a further 10% during 2015.

However, some City analysts believe that these impressive results and forecasts are too good to be true. 

Conflicting opinions

Specifically, some City analysts believe that due to the complicated way HSBC reports profits, investors are being misled and underlying figures are worse than those being reported by the bank.

In addition, some analysts believe that the bank’s underlying, core banking business is actually growing at a slower rate than stated within results. Specifically, according to one analyst, HSBC’s core revenue could actually be expanding at a rate 10% less than that reported within results. Moreover, analysts have started to question HSBC’s growth forecasts, questioning whether or not they are too optimistic. 

Foolish summary

All in all then HSBC is facing headwinds within Asia and comments that the bank has been misreporting results are worrying. Nevertheless, these claims of misreporting are, as of yet unproven and HSBC’s capital cushion and geographical diversification mean that the bank is not overly exposed to an Asian slowdown.