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Tuesday, 28 June 2016

Target practice

HSBC still aiming at its moving targets

Stuart Gulliver is sticking to his targets. That makes him stick out. While many bank chiefs have scaled back their financial ambitions, HSBC’s chief executive is persisting with the goals he set for the lender 18 months ago. But if one-off charges for UK mis-selling and U.S. money-laundering keep repeating, HSBC may yet need to lower its sights.

For a bank focused on emerging markets, HSBC has its share of first-world headaches. The U.S. sub-prime mortgage nightmare is ending but regulatory bills have created new torment. In the third quarter, HSBC set aside another $800 million for a possible settlement of U.S. money-laundering investigations, and warned that penalties could be “significantly higher” than the total $1.5 billion it has stuffed in the kitty. Meanwhile, compensating UK customers for payment protection insurance they didn’t need cost HSBC another $353 million. Again, there’s no clear end in sight.

Exclude these charges - and accounting quirks like the rising value of HSBC’s own debt - and the bank is making progress towards its targets of a cost-income ratio below 52 percent and a return on equity of more than 12 percent. Headcount is down about 10 percent since the end of 2010, with further cuts to come. Its commercial and investment banking arms both reported revenue growth in the quarter. Bad debts dropped, validating HSBC’s decision to shift from unsecured to secured lending.

Exclude the one-off charges, and HSBC has a reasonable chance of delivering. Yet investors might reasonably wonder when the charges will stop recurring. Given the regulatory crackdown, fines and compensation charges may just be part of the cost of being a bank. Moreover, HSBC has spent several hundred million dollars beefing up its U.S. compliance systems. That’s an ongoing drag.

This realisation may yet prompt HSBC to fall in line with rivals and cut its targets when Gulliver reviews progress early next year. Yet even if returns disappoint, investors also seem to think HSBC’s beefed-up balance sheet merits a lower cost of equity, making it easier for the bank to create value. At a multiple of 1.1 times forecast year-end book value, HSBC shares are already giving Gulliver the benefit of the doubt.

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HSBC took a $1.15 billion charge to cover a potential U.S. fine for lax anti money-laundering controls and to pay for compensation for mis-selling products in Britain, eating into its earnings for the third quarter of 2012.

The bank set aside $800 million related to ongoing U.S. investigations in the third quarter, adding to the $700 million that it earmarked in July. It also made an additional provision of $353 million for mis-selling UK payment protection insurance. HSBC warned that U.S. financial penalties could be “significantly higher” than the amount it has accrued so far.

Profit before tax in the three months to September was $3.5 billion, down from $7.2 billion for same period of 2011. However, these figures were distorted by charges related to the increased value of the bank’s own debt. On an underlying basis, pre-tax profit in the quarter more than doubled to $5.0 billion.

On an underlying basis, HSBC’s costs were 63.7 percent of income in the third quarter, down from 65.8 percent in the same period of 2011. Chief executive Stuart Gulliver is targeting a cost-income rate of 48-52 percent.

HSBC’s return on average shareholders’ equity in the quarter was 5.8 percent on an annualised basis, compared to a target of 12-15 percent.

At 1030 GMT, HSBC shares were down 1.6 percent at 257 pence.

(An earlier version of this story incorrectly stated “HSBC set aside another $700 million” in paragraph 2.)

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