HSBC’s Gulliver signs off with profit miss

Having generated shareholder returns of 70% during seven challenging years as HSBC (HSBA) chief executive, Stuart Gulliver’s final day in charge failed to deliver the rousing farewell that many had been expecting.

While Gulliver did announce a rise in revenues for the first time in six years, profits of $21 billion for 2017 were still short of analysts’ expectations. In addition, there was no extension to its share buy-back programme as HSBC is focused on raising up to $7 billion in capital during the first half of 2018.

Despite the results-day disappointment and subsequent 4% share price fall, investors are unlikely to change their view on the impact that Gulliver has had on the global banking giant since he took charge in January 2011.

He’s cleaned up the business after various legacy issues and scandals, while overseeing the most extensive transformation programme in the bank’s 153-year history as its focus shifts towards Asia. As Gulliver said today: “HSBC is simpler, stronger, and more secure than it was in 2011.”

In 2017, HSBC returned a total of $3 billion through share buy-backs and paid more in dividends than any other European or American bank. In fact, Gulliver has announced $64.7 billion in declared dividends and $5.5 billion in share buy-backs since he took the helm.

The bank also boasts one of the most resilient capital ratios in the industry, with a common equity tier 1 ratio of 14.5%. But there are also lingering frustrations as HSBC struggles to reach its medium-term target for 10% return on equity. This benchmark stood at 5.9% in 2017.

Rising interest rates should help Gulliver’s successor John Flint to make inroads into the ratio, although he is not expected to unveil his detailed strategy for doing so until half-year results in the summer.

He said today: “The fundamentals of HSBC will remain the same as they always have – strong funding and liquidity, strong capital, and a conservative approach to credit.”

Like Gulliver, who joined HSBC in 1980, Flint is another HSBC veteran. He has stepped up from running the retail banking and wealth management division.

It’s likely that Flint will benefit from some favourable tailwinds as he settles into the top job, with most major economies set for reasonable growth in 2018.

Fears of a hard landing in China have receded, with the conclusion of large regional trade agreements in 2018, mostly involving Asian nations, also providing HSBC with cause for optimism.

Shares are up 69% over the last two years and by 7.5% over the last year, compared with a 0.7% dip for the wider FTSE 100 Index (UKX).

However, UBS analysts think that the good news is already in the price as they have a ‘neutral’ rating and 725p price target. They warned last week that without positive earnings revisions there was a risk of a pullback in HSBC shares.

As the UK banking sector’s earnings season gets into full swing this week, the team at UBS favours Lloyds Banking Group (LLOY) and Barclays (BARC).

– Why Lloyds is the bank to watch this results season

Their valuation of HSBC is based on 14 times forward earnings per share (EPS) and a 5% dividend yield, which they see remaining consistent over the next couple of years.

Richard Hunter, head of markets at interactive investor, added: “A banking behemoth such as HSBC will always have its detractors, but the general market view of the company as a hold is the least an investor can expect for income and stability alone.”

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