Of Special Interest

10th May 2011

HSBC Q1 pre-tax down 14.1%

HSBC reported net attributable of $4,158m (€2,867m £2,534m ¥334.1bn Y26,999m) for Q1 UP 58% on the year ago figure. Whilst this sounds good the tax position in both years are anomalous and the pre-tax figure is $4,906m DOWN 14%.

The core cause is operating income DOWN 5% after insurance claims and operating expenses UP 16.5%. This puts the Cost to Income ratio the wrong side of 60%. Whilst HSBC has provided summary accounts for the quarter's results for the first time they do not provide an expense breakdown. The bank emphasises over $1bn dollars cost from own debt at $600m and provision for PPI insurance claims in the UK at $440m as a reason for the fall in pre-tax whilst much less emphasis is placed on the $1.4bn reduced loan impairment cost more than balancing the first two expenses. Higher salary costs and essential IT development costs are said also to be partly to blame but no numbers for these items are given.

A reduction in US consumer lending for strategic reasons is also mentioned. The bank has a strategy day later this week and this is expected to outline the beginnings of a significant restructure. The bank is expected to announce the withdrawal from some countries. It is expected to cut back further on some operations, in particular retail operations which it sees as largely non-core, with the possible exceptions of the UK and Hong Kong. Whilst cost cutting is required it will be announcements following this meeting as to how it intends to increase income that is likely to have the greatest effect on future share price. Shares were trading down a little over 1% in mid-afternoon trading in London following the results announcement.


Income summary Q1 2011 2010 Change
$m $m %
Net interest income 9,911 10,023 -1.1
Net fee income 4,371 4,412 -0.9
Net trading income 2,556 2,873 -11.0
Changes in fair value of own debt -602 -584 3.1
other financial instruments at fair value 291 289 0.7
Gains less losses from financial investments 207 342 -39.5
Dividend income 32 20 60.0
Net earned insurance premiums 3,363 2,922 15.1
Other operating income 314 699 -55.1
__________________________
Total operating income 20,443 20,996 -2.6
Net insurance claims & liabilities movements -3,403 -3,070 10.8
_________________________
Net operating income before loan impairment 17,040 17,926 -4.9
Loan impairment charges and related costs -2,384 -3,787 -37.0
_________________________
Net operating income 14,656 14,139 3.7
Total operating expenses -10,369 -8,898 16.5
__________________________
Operating profit 4,287 5,241 -18.2
Share of profit in associates and JVs 619 471 31.4
________________________
Profit before tax 4,906 5,712 -14.1
Tax expense -491 -2,813 -82.5
________________________
Profit after tax 4,415 2,899 52.3
Non-controlling interests 262 268 -2.2
________________________
Attributable to shareholders 4,153 2,631 57.8

Profit before tax by geographical region
Europe 652 1,857 -64.9
Hong Kong 1,562 1,509 3.5
Rest of Asia-Pacific 1,634 1,302 25.5
Middle East 335 175 91.4
North America 181 450 -59.8
Latin America 542 419 29.4
________________________
Pre-tax profit 4,906 5,712 -14.1