Analyst Note, 23. februar, Erin Davis
We see the bevy of legal charges in HSBC's fourth-quarter results as disappointing but not unexpected, given the industry environment in general and recent headlines about HSBC in particular. However, the key takeaway for us is not the impact of these individual charges (which included an additional $809 million for foreign exchange investigations or $340 million for misselling in the United Kingdom), which we see as easily manageable for the bank with its nearly $200 billion of shareholders' equity. Instead, we see this as clear evidence that our thesis--that regulatory costs will remain at permanently higher levels--is playing out. In fact, we now see our estimate that HSBC will pay another $1.5 billion of fines over the next two years as optimistic, and we're likely to increase it. We think that ongoing legal costs, together with slow global economic growth, is likely to make it difficult for HSBC earn attractive profits. We therefore weren't surprised to see management abandon its 12%-15% return on equity target, which we'd long seen as too ambitious. We think its new target of greater than 10% is achievable, but even that will require some improvement in the operating environment, especially in light of growing capital requirements. We may modestly reduce our fair value estimate for the narrow-moat bank as we review our projections.
We're also troubled by news that CEO Stuart Gulliver has been pulled into the scandal over whether HSBC helped customers to illegally evade taxes. He appears to have sheltered $7.6 million in a Panama-registered company named Worcester Equities. While HSBC's statements that Gulliver's actions were completely legal, transparent, and compliant may be true, we're concerned that this apparent disregard for appearances of propriety (at best) may foretell higher-than-expected legal costs.
Bulls and bears say
Bulls say
- HSBC's exposure to the fastest-growing economies ensures robust demand for its varied products and services, from checking accounts and wealth management to international trade finance.
- The benefits of geographic diversification were highlighted during the financial crisis. Although HSBC took large losses in its North American segment, its other operations picked up the slack, and the bank escaped without reporting a loss.
- HSBC will benefit from improving conditions in the U.K., its largest European market and one of Europe's strongest countries.
Bears say
- HSBC's sprawling network has meant that it is not as efficient or adept at controlling costs as some smaller competitors.
- Falling Chinese growth and commodities prices will dampen HSBC's growth prospects.
- HSBC underestimated the losses it would suffer in its subprime mortgage portfolio by billions. This mistake underscores the difficulty of managing HSBC's huge empire and raises the question of whether it will happen again.
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