Income investors watching mining giants slash shareholder returns and interest rates fall to record lows must be circling HSBC (LSE: HSBA) like sharks in the water. Not only do the lender’s shares offer a whopping 6.4% yield but management announced earlier this month a $2.5bn share buyback to be executed over the next two years.
Does this signal the bank’s long turnaround programme is finally bearing fruit or is management merely papering over ever-more-obvious cracks in the business?
Unfortunately for shareholders, I tend to lean towards the latter. The bank still hasn’t solved the underlying problem of falling revenue and stubbornly high costs, particularly from the non-core markets it expanded into at a rapid clip over the past decade.
High operating expenses are why management has announced a series of cost-cutting measures intended to slash $5bn from expenditures in the coming years. Interim results for the half-year through June appear to show decent progress on this front with operating costs down 3%. The problem is that revenue over the same period fell a full 11% year-on-year.
If the bank can’t figure out how to stop sales falling faster than costs, profits are going nowhere but down. Indeed, we saw this over the past six months as pre-tax profits collapsed 29% year-on-year.
This is imperiling dividend cover, which analysts are expecting to slip to 1.1 times payouts this year. The promised share buyback is something of a red herring as well. The cash being returned to shareholders wasn’t generated from operations, but rather the $5.2bn sale of Brazilian operations. With plans to offload Turkish operations put on hold due to lowball bids and falling profitability in core Chinese operations, I’m not expecting continued good news for income investors from HSBC.
No good news yet
Shareholders of RBS (LSE: RBS) are accustomed to bad news after eight years of annual losses and interim results announced at the beginning of the month kept the losing streak alive. Total losses for the six-month period hit £2bn as misconduct charges and writedowns took their toll on the majority state-owned lender.
While analysts had been expecting poor results the bank threw income investors a curveball when it unexpectedly announced it was shelving plans to spin off retail bank Williams & Glyn. While achieving nothing after spending seven years and £1.5bn on the bank’s spinoff is bad enough, it was also a pre-condition for RBS resuming dividend payments.
While there are suitors for Williams & Glyn that will take it off RBS’s hands eventually, investors shouldn’t expect stellar dividends any time soon. That’s because even after seven years of cost-cutting divesting operations, RBS still has significant amounts of fat to cut.
And, while management boasts of a healthy retail bank hiding under the layers of dross, there are problems on that end as well. The bank’s underlying adjusted cost-to-income ratio actually rose over the past six months from 64% to 72% year-on-year as, just like at HSBC, cost-cutting failed to keep pace with falling income.
With operating losses mounting, net interest margin set to fall after the BoE’s rate cut and further pain on the way in regards to misconduct charges, income investors may have longer to wait before good news arrives from RBS.