Shares in HSBC fell by 2.3 per cent in morning trading on Monday, after the London-based bank reported a 6 per cent fall in underlying profits to $17.7bn for 2011. A strong rise in profits from emerging markets, especially Asia and Latin America, was not enough to offset worse-than-expected earnings in Europe and the US.
HSBC – which put a photo of a Chinese ship unloading machinery in Brazil on the front of its annual report and accounts for 2011 – could hardly be making a stronger commitment to emerging markets as it strives to meet earnings and efficiency targets. But its approach is more hard-headed than the friends-with-everyone, “world’s local bank” strategy of old.
It was a dismal year in developed markets for the bank. Underlying profits in Europe fell from $4.38bn in 2010 to $1.72bn in 2011, a fall of 61 per cent. In North America, a profit of $285m in 2010 was followed by a net loss of $870m last year (caused largely by adjustments of $970m).
By contrast, underlying profits rose in Asia-Pacific excluding Hong Kong from $5.94bn to $7.34bn; in Latin America from $1.84bn to $2.23bn; and in the Middle East and north Africa from $924m to $1.45bn. Profits in Hong Kong were also up, from $5.55bn to $5.82bn.
But as HSBC outlined in its strategic review last May, countries that don’t offer the desired returns will be ditched. That’s why, while HSBC sold loss-making businesses in developed markets, especially the US, it also sold some of its EM businesses.
This from the directors’ report:
to ensure effective deployment of capital, we undertook a Group-wide review of our business, testing each part of the portfolio against our five filters framework. This looks at the strategic relevance of each country, and each business in each country, assessing their connectivity, economic development, profitability, cost efficiency and liquidity. As a result, we announced 16 disposals or closures in 2011 and a further 3 in 2012, including two large transactions in the US, the disposal of Retail Banking and Wealth Management operations in Russia, Chile and Thailand and the exit of operations in Poland and Georgia. When completed, these disposals and closures should represent a reduction of around US$50bn of risk-weighted assets and the transfer to the acquirers of approximately 12,000 full-time equivalent employees. We are continuing this process in 2012 and have identified a number of further transactions.
And this from Stuart Gulliver, the bank’s chief executive since January last year:
most importantly, we continued to position the business for growth, increasing revenues in each of the world’s faster-growing regions, particularly in mainland China, India, Malaysia, Brazil and Argentina
But Gulliver also recognises that while the prospects are good the pace of growth will not be as fast this year:
we expect continued strong growth in the dynamic markets of Asia, Latin America and the Middle East, although at a more moderate pace than in 2011, and that mainland China will achieve a soft landing. We believe that trade and capital flows between emerging areas of the world will also continue to grow, and could increase tenfold in the next 40 years.
With growth in some key markets slowing this year, questions remain over the bank’s ability to meet its targets of a return on equity of between 12 per cent and 15 per cent and a cost-efficiency ratio of between 48 per cent and 52 per cent.
Return on equity, while up from 9.5 per cent in 2011, was short of target at 10.9 per cent. And HSBC’s efficiency ratio worsened from 55.6 per cent to 61 per cent on an underlying basis.
In the year that HSBC published more information than before on directors’ and senior executives’ pay – and awarded Gulliver £5.9m in bonuses – there will be more pressure than ever to at least get closer to delivering those targets.
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