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Fitch: HSBC's Performance Firm despite Expense Challenges
August 6, 2014 / 9:42 AM / 3 years ago

Fitch: HSBC's Performance Firm despite Expense Challenges

(The following statement was released by the rating agency) HONG KONG, August 06 (Fitch) Fitch Ratings says HSBC Holdings PLC's results confirm robust balance sheet strength despite recurring revenue and expense challenges. Legal and compliance expenditures remain elevated at USD601m but are offset by low loan impairment charges. Revenue headwinds persist but we view them as less of a risk due to de-risking and strategic realignment. Competing in complex operating and geopolitical environments and normalising credit costs are additional challenges. Underlying pre-tax profit of USD12.6bn in 1H14 (1H13: USD13bn) was supported by 5.4% growth in gross loans. The bank focuses its expansion in the US, where commercial lending has grown by 11% since end-2013 and in the UK and Germany where gross loans respectively grew 5.9% and 25.7% in the first six months of 2014. Lending to greater China also shows strong momentum with Taiwan growing by 22%, Mainland China by 9.4% and Hong Kong by 8.2%. Fitch believes that credit costs (below 40bp of loans or 5% of operating income in 1H14) will eventually surge, in particular in Asia and the UK and when interest rates rise. While term lending has been on the rise, the share of loans beyond five years declined to 29% at end-1H14 from 31% in 1H13. Investment in risk and compliance and appropriate staff incentive-setting remain a priority. HSBC employed 9.5% of its headcount in this area at end-1H14, of which 6,300 were in regulatory and financial crime compliance and 2,000 hired over the last 15 months. This contributed to a weaker reported cost efficiency ratio of 59% in 1H14 compared with 54% in 1H13. Financial markets-related revenues decreased in 2Q14 to USD1.6bn (1Q14: USD2.2bn) due to weaker performance across all products, particularly in FX as a result of subdued customer activity. The decline was less pronounced for 1H14 from a year ago as combined rates, equities, credit and FX revenues contributed USD3.8bn (1H13: USD4.1bn). This was offset by sound group-wide revenues from payments and trade finance of USD5.5bn (1H13: USD5.3bn). The group's consolidated capital buffer increased to 90bps at end-June 2014 from 40bps at end-1Q14. Its fully loaded common equity Tier 1 ratio was 11.3% at end-June 2014 which compared with an indicative minimum requirement of 10.4% as of January 2019. The capital ratios were 10.7% for its Hong Kong subsidiary (end-point basis) and 9.3% for HSBC Bank plc (CRD IV transitional basis). The latter is lower than that of similarly rated peers as it reflects the high proportion of trading business booked at the UK entity. HSBC Bank reported lower profits yoy on the back of lower operating income despite significantly reduced loan impairment charges. Profitability were particularly affected in the retail banking and wealth management segment, where UK reported a quarterly loss (largely the result of significant conduct and redress charges) and in which both France and Turkey reported half-year losses. HSBC USA's 2Q14 net income was little changed from 2Q13 although trading revenues fell by USD100m. The bank had a sizeable income tax benefit during the quarter, which allowed it to report positive net income. HSBC Finance Corp's balance sheet shrank a further USD3.4bn over the first six months of 2014. The entity reported net income of USD229m and is no longer a drag on the overall North American operations. Contact: Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited. 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong SAR Claudia Nelson Senior Director +44 203530 1191 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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