By Howard Mustoe and Gavin Finch
(Adds shares at close in fifth paragraph.)
Feb. 27 (Bloomberg) -- HSBC Holdings Plc, Europe's largest bank by market value, said it's on a "clear trajectory" to meeting its profitability target next year as it posted pretax profit that missed analyst estimates.
Pretax profit rose 15 percent to $21.9 billion last year, missing the $22.3 billion median estimate of 25 analysts polled by Bloomberg. Chief Executive Officer Stuart Gulliver told reporters today the lender is still "confident" of hitting its 12 percent return on equity target by 2013.
Gulliver has sold or closed 19 units since 2010 and is cutting 30,000 jobs to save as much as $3.5 billion by 2013 and revive profitability. The lender had made $900 million of savings and expects to meet the "upper end" of its cost- reduction goal by 2013, he said today. HSBC is sticking with its profit target even after Barclays Plc said it won't make its target in 2013 and Royal Bank of Scotland Group Plc reduced its goal.
"We regard these results as reassuring, rather than spectacular," Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd. in London. They "contain all the messages we were hoping for on the restructuring."
The shares fell 3.7 percent to 553.5 pence in London trading. The stock has dropped 22 percent in the past 12 months, less than the 43-member Bloomberg Europe Banks and Financial Services Index's 29 percent decline. The lender will pay a 41 cent-a-share dividend for 2011, the most since 2007.
Return on Equity
Return on equity rose to 10.9 percent from 9.5 percent last year, still short of the lender's target range of 12 percent to 15 percent. Gulliver said in November the measure would be at the "softer end" of its range by 2013.
"The strength of our position gives us confidence that by the end of 2012 we will have developed a clear trajectory towards meeting our target," Gulliver, 52, said in a statement today. "A substantial amount has been achieved during 2011, but this will be a long journey with significant headwinds."
Costs as a proportion of revenue climbed to 57.5 percent from 55.2 percent, more than the 48 percent to 52 percent target range set by HSBC. The lender blamed the increase on rising wages and costs for compensating both clients who were mis-sold insurance to cover loan repayments and elderly customers who were advised to buy products to fund nursing-home costs that would only pay out after some of them were expected to die.
"Cost control remains an issue," said Gary Greenwood, an analyst at Shore Capital Ltd. in Liverpool. "There were slightly higher costs and weaker revenue than I was expecting."
Commercial Banking Record
Pretax profit from HSBC's commercial banking arm rose 31 percent to a record $7.9 billion, fueled by lending in China, India, Malaysia, Brazil and Argentina and lower bad loan provisions. The division, which serves 3.6 million business customers, was the bank's most profitable segment.
Profit in Hong Kong, HSBC's biggest single Asian market, rose 2.3 percent to $5.82 billion, and 27 percent to $7.47 billion in the rest of Asia.
"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," Gulliver said today.
Pretax profit in North America declined 78 percent to $100 million and increased in Europe by 8.6 percent to $4.67 billion. Impairments and other provisions across the bank declined to $12.1 billion from $14 billion, the company said.
The "problem" for HSBC's revenue is that "loan growth in Hong Kong and Asia is slowing" as HSBC pares its U.S. unit, said Ian Gordon, an analyst at Investec Plc in London with a "hold" rating on the stock.
Gulliver has disposed of the lender's retail and wealth management units in Russia, Chile and Thailand. In August, the lender said it will sell its U.S. card and retail services unit to Capital One Financial Corp.
Investment Banking
Profit at HSBC's investment banking division, led by Samir Assaf, fell 24 percent to $7 billion as Europe's sovereign debt crisis hurt revenue in credit and rates. The decline compares with a 32 percent drop to 2.97 billion pounds at Barclays's securities unit in the same period. Income from consumer banking and wealth management advanced 11 percent to $4.3 billion.
"The third quarter was very very difficult" for the investment bank, said Gulliver. "The fourth quarter recovered somewhat and January has actually been very good."
The lender said it borrowed 5.2 billion euros ($7 billion) of three-year loans under the European Central Bank's long-term refinancing operation in December. HSBC will borrow a further 350 million euros at the ECB's second auction this week, Gulliver said today.
Net income rose to $16.8 billion last year from $13.2 billion in the previous 12 months, meeting the $16.5 billion median estimate of 24 analysts surveyed by Bloomberg.
Profit was boosted by a $4.16 billion gain on the value of its own debt, under an accounting rule that requires banks to book gains when the value of their debt declines because a profit would be realized were the bank to repurchase that debt.
HSBC is alone among the four British lenders to have reported results for 2011 to report an increase in profit.
Lloyds Banking Group Plc, Britain's biggest mortgage lender, and RBS, Britain's biggest government-owned lender, reported wider losses after compensating customers improperly sold insurance. Barclays, which posted a 16 percent drop in profit, said it may fail to meet its 13 percent ROE target by 2013 after the gauge dropped to 6.6 percent in 2011.
Standard Chartered Plc, which like HSBC makes most of its profit in Asia, may say profit rose 9 percent when it publishes results on Feb. 29, according to the median estimate of 17 analysts surveyed by Bloomberg.
--Editors: Jon Menon, Edward Evans
To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net. Gavin Finch in London at gfinch@bloomberg.net
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
