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HSBC’s Financial Performance Disappoints: Warns on China

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On January 19, HSBC Holdings Plc., the largest banking institution in Europe by market value, released its financial report for the last quarter in 2018.

The banking giant revealed that profits fell below industry expectations, as the bank’s operations were stifled by increasing costs, a massive sell-off in global markets during the fourth quarter and reduced market activity in key international markets and investment destinations.

The company’s stock price had dropped 3% pre-market trading today.

Underwhelming Profits. Should Investors be Concerned?

According to the report, HSBC recorded a $19.9 billion pre-tax profit for the whole of 2018, a figure which came in 15.9 percent higher than the profits recorded in 2017. Revenues also grew by 4.5 percent in 2018 rising to $53.78 billion.

However, while the report showed a profitable year in 2018, they were still mostly underwhelming.
Forecasts compiled by financial data and infrastructure provider Refinitiv showed that based on 17 analysts’ estimation, the bank was expected to record $21.26 billion in pre-tax profits (marking a 23.8 percent increase), while revenues were projected to rise by 6.28 percent to $54.674 billion.

The bank, as well as other major banking institutions in the world, were affected by market corrections in the latter part of last year. For Q4 2018, HSBC’s net profits were peed at $1.5 billion
“Negative Jaws” for 2018

Another notable disappointment in the bank’s performance for 2018 also came in its inability to achieve “positive jaws,” a financial metric that is reviewed by company investors, which monitors the bank’s growth rate in terms of revenues and costs. As regards its negative jaws, the bank pointed out the unfavorable global economic environment for 2018.

Tough Global Market Conditions

Speaking on the earnings call, HSBC’s CEO John Flint state that the bank still recognizes the various risks posed by the current global economic climate, which has been primarily hampered by trade tensions between China and the United States. He also touched on the current trend of interest rates (which seem to discourage bank-granted loans and is pushing investors elsewhere). After the announcement, shares of HSBC in Hong Kong fell as much as 2.7 percent.

China is Key to HSBC’s Profitability

One of the significant challenges to HSBC’s operational and growth strategy has been an economic downturn in China, which has only been amplified by the ongoing trade war with the United States and the statement in which negotiations have been placed.

HSBC is currently investing a significant portion of its assets and resources into the Asian continent, as the company makes most of its profits from there. In an attempt to boost profitability, the bank has executed a corporate restructuring process where it focuses on high-growth Asian markets while reducing its holdings and business in other locations.

This means that an economic slowdown in a country like China is sure to affect the company’s overall profitability.

The rate of economic growth in China receded to a mere 6.6 percent in 2018, marking the country’s slowest economic growth rate in almost three decades. This was due in large part to the increasing costs of borrowing and a general reduction in risky lending, which affected the capital acquisition and investment capabilities of many smaller, private institutions.

HSBC’s profits in Asia grew to $17.8 billion in 2018, which amounted to 89% of the bank’s total profit haul for the past year.

However, due to inconsistent foreign exchange movements, the bank’s core capital ratio notably fell to 14 at the end of 2018, down from 14.5 percent recorded a year before.

The bank is also being affected by subpar performances in the United Kingdom. Stringent global trade conditions and the imminence of Brexit had adverse effects on factories all over Britain, and this led to a recession in general economic activities in the country.

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Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works. jimmy@moneycheck.com


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