DBRS: HSBC 2014 Results Down on Higher Regulatory and Compliance Costs

Summary:
• Profit before tax of USD 18.7 billion in 2014, down 17% YoY; includes fines, settlements, UK customer redress and associated provisions of USD 3.7 billion
• Costs remain a challenge with a cost-income ratio of 67%
• Balance sheet remains strong and fully-loaded CET1 ratio was 11.1%
• DBRS rates HSBC Holdings plc Senior Unsecured Long-Term Debt at AA with a Stable trend

DBRS Ratings Limited (DBRS) commented that regulatory fines and settlements affected the 2014 results of HSBC Holdings (HSBC or the Group), contributing to a 17% decrease in profit before tax (PBT) to USD 18.7 billion. On an adjusted basis (excluding currency translation and significant items, which include FV of own debt, disposals, fines and litigation) PBT was down 1% to USD 22.8 billion. The Group reported a significant drop in profits in 4Q14 on a non-adjusted basis (reported PBT of USD 1.7 billion compared to USD 4.0 billion in 4Q13) due to a number of issues, including higher settlements and customer redress, the impact of lower profits in Markets, a higher UK tax levy, and higher gains on disposals/ reclassifications in 4Q13.

HSBC still benefits from the breadth of its franchise across geographies and products, with a strong performance in 2014 in Asia and Middle East & North Africa offsetting weaker results in Europe and Latin America, and some stabilisation in North America. Management announced they would be concentrating on improving the performance of operations in the US, Brazil, Mexico and Turkey.

On a product basis, strong returns continued in Commercial Banking (adjusted PBT up 13% YoY), whilst Retail Banking and Wealth Management (RB&WM) was down 4%, and performance was weak in both Private Banking (down 18%) reflecting the derisking of the business, and Global Banking & Markets (GB&M), which was down 12% including the impact of the introduction of funding fair value adjustment (FFVA).

Costs remain a challenge for the Group, with adjusted operating expenditure up by USD 2.2 billion, due to higher regulatory and compliance costs as well as inflationary pressures. Reporting a cost-income ratio of 67% in 2014 (59.6% in 2013), the Group has moved away from its previous target of a cost-income ratio in the mid-50s and is now just aiming to achieve positive jaws on an adjusted basis.

The Group’s results did, however, benefit from a reduction in loan impairment charges which totalled USD 3.9 billion in FY14, down from USD 5.5 billion in 2013. Across the Group, Loan Impairment Charges as a % of Loans were down to 40 bps (60 bps in 2013).

DBRS considers HSBC’s strong balance sheet underpins the Group’s high ratings, and capital ratios strengthened further with the fully-loaded CET1 ratio up to 11.1% (10.9% at end-December 2013). However, reflecting the ongoing impact of regulatory pressures on profitability, the Group announced it would now target a lower RoE of over 10% (the previous target was 12 – 15%), based on the assumption of a higher fully-loaded CET1 ratio requirement of 12 – 13%.

DBRS rates HSBC Holdings plc Senior Unsecured Long-Term Debt at AA with a Stable trend.

Notes:
All figures are in U.S. dollar unless otherwise noted.