Monday, 3 August 2015

HSBC - the investment case is still all about cost cutting

After the June strategic update I wrote a piece (link here) detailing how the key for HSBC was cost cutting based.  Today's interim results in my view reiterate that.

A quick headline summary of the results today would focus as much on an asset sale as well as progression in the numbers:

HSBC has agreed to sell its Brazilian business for $5.2bn – positive simplification move

Pre-tax profits at the bank, which has threatened to move its headquarters from the UK, rose to $13.6bn in the six months to June 30 from $12.3bn a year ago. Revenues climbed to $32.9bn from $31.1bn.

 Moving onto the presentation pack/conference call in the latter I noted unusually…bullet points on the front page!

All of the above consistent with the group June strategic turnaround guidance in my view. 

On numbers quite impressed by RoE which is currently running ahead of target whilst ‘Negative jaws largely in line with our expectations for the first half of the year’.  Said ‘Positive jaws’ FY target as per below a significant challenge for the business…will have a lot of cost savings initiatives for H2 

Other operational headlines include - 

Brazil disposal – ‘major transaction that generates excellent value for our shareholders….consistent with our Investor Update in June’

Net interest margin – further dilution ‘pretty marginal’, noted a competitive environment in Europe especially in UK mortgage lending

Talking divisionally - 

Asian capital markets business going forward post the Chinese stock market fall: ‘muted but not completely reversed’.  Important as global markets / Asia the big regional driver yoy in the numbers

I also noted the impact of RWA reductions on the tier 1 ratio...and as the company noted ‘ongoing work…our first action is to reduce the group’s RWA’

Capital return/dividends -
Would return capital if cannot find opportunities to deploy rates at RoEs >10%.  Believe could deploy ‘US$150bn very easily’ looking at current opportunities.  Beyond this – and regulatory requirements – then would return the rest to shareholders.  However will do this via specials as will not look to grow the ordinary dividend beyond profit before tax growth – but this whole debate some way off.  One analyst asked whether it would be a ‘2018 discussion’.  The company did not answer this but said ‘hope for more clarity’ (on regulation, initiatives etc.) before then.   

Conclusion –

After the June strategic update I noted:

'I think they will re-domicile and go to HK.  Good for the dividend, people can hardly be surprised.  X1 book or 650s no problem.  Believers in the plan will see a run at 700p+.  In the meantime you pick up a 5%+ dividend.  Anything <600p I would buy more.  That makes them a buy today…'  

Would still agree with this.  Big next half year for the business with cost cutting uppermost in thoughts but Brazil deal sensible/good step, like the RoE generation today.  However given regional/divisional momentum from Asia/global markets got to be a bit aware of some overhangs on trading…meaning cost cutting/change even more important.  I still think the plan has credibility.

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