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Target practice

5 November 2012 By Peter Thal Larsen

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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