Shares in banking giant HSBC took a tumble on Wednesday after the firm saw a massive 36% drop in underlying pre-tax profits in the third quarter and warned of "very challenging" global economic conditions.
For the three months to the end of September, the figure fell from $4.6bn to $3bn, some 37% below Citi's forecasts, mainly due to falling revenues in investment banking, an adverse movement in its hedging strategy of $0.7bn. Nomura had expected a figure closer to $4.3bn.
The firm also said that an increase in loan impairment charges, primarily in North America, had an adverse impact on the bottom line, as weak economic conditions affected homeowners' abilities to make their mortgage repayments, leading to a rise in delinquency rates.
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Analysts at Citi said that in the US, "provisions are expected to remain elevated in the near future due to continued weakness in the housing market, namely higher delinquency rates, increased severity, and delays in foreclosure activity."
The "reported" profit before tax figure, which gives a less accurate sense of how the business is performing was actually up $3.6bn on the equivalent period of 2010, at $7.2bn, including a $4.1 favourable move in the value of the bank's own debt. This will not be the figure investors will be looking at, however.
"Trading conditions showed some improvement during October, but they remain very difficult and continuing turbulence in global markets may result in further downside risk. The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world," the statement said.
However, in response to today's figures the group's chief executive, Stuart Gulliver, has emphasised that the travails of HSBC are not specific to the company but industry wide: "The sector faces significant headwinds. The continuing macroeconomic, regulatory and political uncertainty, particularly in Europe, adversely affected our industry's performance in the quarter," he said.
Nomura seemed to agree, saying that while downgrades to consensus estimates appear likely post results, "we would argue that virtually all banks have downgrade risk at this point".
The problem Gulliver has is that the headline numbers are not supported by other problematic metrics, including the cost efficiency ratio which has worsened, albeit slightly, from 54% to 54.6%. This despite operating expenses being down and the number of full time employees dropping by 5000 since the start of the year.
Evolution Securities says that while HSBC is not overly expensive - the stock is trading on 1.3 times tangible net asset value - "given our expectations that revenues, costs and returns are likely to continue to disappoint against inflated sellside estimates, we see better value elsewhere".
The bank's share price dropped on Wednesday, and was down 6.03% at 505.1p by 14:25.
BS & BC
