HSBC needs to lower one-off costs and increase returns to boost share price further

“HSBC has just shown its best growth in customer deposits and loans since early 2014 and shown its first increase in risk-weighted assets for four years, but the shares are down, as if investors are politely telling the new management team of chair Mark Tucker and chief executive John Flint not to get too aggressive when it comes to future expansion plans or even acquisitions,” says Russ Mould, AJ Bell Investment Director.

20 February 2018

“This may be because return on equity is still way below the group’s 10% target and investors are becoming more wary of risk-taking as interest rates rise and financial conditions start to tighten, albeit slowly, from the loosest they have been in centuries.”

“In addition, HSBC already trades at a sizeable premium to its tangible net asset, or book, value of $7.26 a share once intangible items are excluded. Using the year-end cross-rate of $1.3510 to the pound, that equates to 543p and the shares trade at 1.3 times that level.

		2018E
	P/E	Price/book	Dividend yield	Dividend cover
Barclays	9.0 x	0.72 x	3.2%	3.5 x
HBSC	13.2 x	1.34 x	5.0%	1.5 x
Lloyds	9.6 x	1.27 x	6.4%	1.6 x
Royal Bank of Scotland	11.0 x	0.96 x	3.2%	2.9 x
Standard Chartered	14.2 x	0.88 x	3.0%	2.3 x

Source: Digital Look, Consensus analysts’ forecasts, company accounts. PE and yield based on 2018 forecasts, book value based on last published net asset value per share figure

“For the shares to go markedly higher, return on equity will need to improve from 5.6%, although income seekers will warm to the 5% dividend yield implied by an unchanged $0.51-a-share dividend for 2018.

“Investors will also be hoping that the one-off items which continue to litter HSBC’s profit and loss accounts start to diminish, so that stated income gets closer to adjusted income.

“Since 2013, restructuring costs, loan impairments and conduct and litigation fines and costs have come to a total of £25 billion, compared to pre-tax profit over the same five-year period of £57 billion and dividend payments of £34 billion.

£ million	2013	2014	2015	2016	2017	TOTAL
Litigation/conduct	1,902	2,100	1,531	1,245	500	7,277
Impairments	3,508	2,358	2,473	2,456	1,338	12,133
Restructuring	305	173	781	2,356	2,300	5,914
TOTAL	5,715	4,630	4,784	6,057	4,138	25,325
Pre-tax profit	13,676	12,453	12,578	5,243	13,319	57,269
Dividends	5,767	6,561	6,692	7,482	7,914	34,415

Source: Company accounts

“A reduction in those costs could increase profits and free up more cash for dividends, although HSBC is not out of the woods just yet, judging by the results statement today, as pages 18 to 25 were taken up by details of legal proceedings and regulatory matters involving the bank.”