HSBC: 2005 results

6:56 a.m. Wed 08 Mar 2006

HSBC, Europe’s largest bank announced record profits for the year to December 2005. The bank, which styles itself ‘the world’s local bank’ – it operates in some 77 countries; reported group pre-tax profit of $20,966m (+11%), ahead of expectations.

The bank reported a steady growth in profits in its two largest markets, Europe (+10.4%) and North America (+13.2%); each of which contributes roughly a third of earnings. Pre-tax profits in the other large market, Hong Kong (it contributes a fifth of earnings), were slightly weaker down 6.4% on last year. Earnings in the rest of the Asia-Pacific grew sharply to $2,574m (+39%).

Net interest income rose 1% to $31,334m while operating expenses rose by 11% to $29,514m, roughly in line with income growth. The cost:income ratio improved slightly to 51.2% (2004: 51.6%) and the capital ratios strengthened: tier 1 is 9% and total capital is 12.8%.

In many ways this is an excellent set of results, the only niggles are the decline in the profits in Hong Kong (and the lack of an explanation thereof) and the 26% increase in bad debts to $7,801m. The bank said that while credit conditions were generally benign, they experienced an increase in US bad debts due to the effect of the hurricanes and accelerated bankruptcy filings ahead of a change in the law. In the UK the bank noted a rise in personal bankruptcies following an earlier relaxation in the law and a general expansion in credit availability.

The company is bullish in its short-term outlook but more cautious in its long term outlook. HSBC’s global presence is strength because earnings are less reliant on a single market and because it has good exposure to fast-growing emerging markets particularly China and India.

The bank is well managed and has a reputation for prudence and thrift – commentators have remarked on its Sino-Scottish frugality. It must be admitted however, that while its cost:income ratio is reasonable, it is not as good as the best in the industry (which range from 45%-50%).

On the whole, prospects look good, the share trades at 989.5p, on a prospective PE (2006 earnings) of 13.9x, at the upper end of the sector range with a yield of 4.1%.