Shares of HSBC (LSE: HSBA) (NYSE: HSBC.US) fell as much as 6% in early trading this morning, after the company released disappointing annual results.
The FTSE 100 banking giant reported a 17% dive in profit before tax in 2014 to $18.7bn. Fines, settlements and UK customer redress all took their toll in what chief executive Stuart Gulliver called “a challenging year”.
While the company said that on an underlying basis profit was broadly unchanged from 2013, and reported lower impairment charges and a small uptick in its common equity tier 1 capital ratio, the results were disappointing overall and below market expectations.
Return on equity was particularly disappointing at 7.3%, compared with 9.2% in 2013, and while management reported “a number of encouraging signs” in some areas of its business, the market seems to have taken the gloomiest parts of the company’s outlook statement to heart:
“It is impossible not to reflect on the very broad range of uncertainties and challenges to be addressed in 2015 and beyond, most of which are outside our control, particularly against a backdrop of patchy economic recovery and limited policy ammunition.”
The company recited a litany of issues that could materially affect its trading going forward: geopolitical tensions, eurozone membership uncertainties, political changes, currency and commodity price realignments, interest rate moves and the effectiveness of central banks’ unconventional policies … “to name but a few”[!].
HSBC’s shares have been weak for some time, and this morning’s fall to a 52-week low of 570p seems to confirm the market’s view that the consensus analyst outlook on the company’s earnings and dividends has been over-optimistic, and that forecasts will have to be revised down.
As things stand, at a share price of 570p, the forecasts ahead of today’s results put HSBC ostensibly in “bargain” territory: a P/E of 9.6 for 2015 falls to 8.9 for 2016, while a dividend yield of 6.2% rises to 6.8%. I think we’ll be seeing plenty of analysts taking the red pen to their forecasts.
HSBC’s dividend yield has been a big draw for investors for some time, but the meagre 2% rise to 50 cents announced in today’s results was below consensus expectations of 51.2 cents.
Furthermore, while the company restated its commitment to grow the dividend, there was a somewhat ominous-sounding caveat from management:
“To be clear, the progression of dividends should be consistent with the growth of the overall profitability of the Group and is predicated on our ability to meet regulatory capital requirements in a timely manner. These targets offer a realistic reflection of the capabilities of HSBC in the prevailing operating environment.”
The question for investors today is: does the share price adequately discount the outlook for earnings and the risk of a dividend cut? I think it does, but it can only be a “gut” call, given the multitude of uncertainties facing the bank.