Biggest bank HSBC Holdings Plc, Earnings miss estimates as investment Bank profit falls

HSBC Holdings Plc, Europe’s biggest bank by market value, reported full-year earnings that missed analyst estimates as investment banking income fell and costs climbed to an “unacceptable” level.

Net income rose to $13.2 billion in 2010 from $5.83 billion the previous year, missing the $13.72 billion median estimate of 15 analysts surveyed by Bloomberg. Pretax profit at the securities unit fell to $9.5 billion in 2010 from $10.5 billion in 2009, the London-based bank said in a statement today. The lender’s cost-efficiency ratio rose to 55.2 percent from 52 percent as rising staff costs outpaced revenue growth.

That ratio is “above our target range and unacceptable,” Chairman Douglas Flint said in today’s statement. “We need to re-engineer the business to remove inefficiencies.”

The earnings are Stuart Gulliver’s first since being named chief executive officer in September. Trading revenue at the investment bank, run by Samir Assaf since Gulliver’s promotion, fell by 15 percent to $5.83 billion. HSBC andStandard Chartered Plc, the two British banks that make most of their profit in Asia, are both paying more to attract employees to their investment banks as revenue from the region jumps. Gulliver said today he’s paying more for bankers in Asiathan in Britain.

Costs were “significantly higher than expected,” and caused the bank to miss analyst estimates, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London with a “buy” rating on the shares. Analysts are likely to reduce their earnings estimates based on today’s statement, he said.

Shares Drop

The stock fell as much as 4.6 percent and was down 4.4 percent at 680 pence as of 9:50 a.m. in London trading. HSBC shares have dropped 5.5 percent in the past 12 months, the worst-performer in the five-member FTSE 350 Banks Index. The stock trades at about 1.5 times its book value, compared with 1.9 times for Standard Chartered.

“In the short term, risks to global growth remain, not least from an elevated oil price,” Gulliver said today. “We therefore expect cyclical volatility to continue -- including in emerging markets -- and progress is unlikely to be linear.”

Oil futures have gained 19 percent in London this year as political unrest disrupts exports from Libya, holder of Africa’s largest crude reserves. Contracts on the London-based ICE Futures Europe exchange peaked at $119.79 a barrel on Feb. 24, their highest price since August 2008.

Libya Turmoil

Turmoil in the Middle East and North Africa hasn’t materially affected the bank’s performance, Gulliver said today.

“We have been closely watching events unfold,” he said. “HSBC has been present in the Middle East for more than 50 years and we remain absolutely committed to its future.”

Provisions for bad loans shrank to $14 billion from $26.5 billion, the London-based bank said in a statement today. HSBC halted lending at its U.S. subprime unit in 2009 after it racked up more than $58 billion in provisions from bad debts.

HSBC North America returned to profit last year after three years of losses, asset sales and the culling of more than 6,000 jobs. Pretax profit was $454 million, compared with a loss of $7.7 billion in 2009. The unit includes the former subprime lender Household International, now closed to new business.

Group revenue rose 3.1 percent to $68.2 billion, the bank said. Employee compensation and benefits rose to $19.8 billion from $18.5 billion, while other administrative costs rose 13 percent to $15.2 billion, the bank said.

HSBC cut its return on equity target to 12 percent to 15 percent, the bank said, from 15 percent to 19 percent, Finance Director Iain Mackay told journalists on a call today.

Gulliver, the former head of the investment bank, was named CEO last year in the culmination of a boardroom struggle as Chairman Stephen Green stepped down to join the government. Green was replaced by Flint, the former finance director.

Gulliver will receive a 5.2 million-pound ($8.4 billion) bonus for 2010, compared with 9 million pounds for 2009, the bank said in its annual report today.

bloomberg.com