HSBC’s 2011 results, announced on Monday, tell a dramatic tale of the shifting fortunes between developed and emerging markets. Emerging markets remained the jewel in its crown, while HSBC’s underlying profits fell dramatically in Europe by 61% to $1.72bn, while also reporting a net loss of $870m in the US due to a large one-off adjustment.
By contrast, profits in its historic stronghold of Hong Kong rose from $5.55bn in 2010 to $5.82bn while ex-HK Asia-Pacific net income rose from $5.94bn to $7.34bn, over the same period. Latin America and the Middle East and North Africa region also boasted rising year-on-year profits, at $2.23bn and $1.45bn respectively.
Still, HSBC shares sold off on Monday as the results at the group level were marginally below expectations. Of principal concern is whether HSBC will be able to make good on its return on equity target of 12% by 2013, a strategy which might force divestments in both developed and emerging markets, following recent exits in Russia, Chile and Poland, among others.
While market attention is focused on short-term earnings pressure in developed markets – boosting margins and loan growth in Europe, for example – the 2011 results throw into sharp relief the transformational potential of Asia. Profitability in India, for example, rose by 22% to $822m, for example.
The road ahead is littered with hurdles, since Asia is not immune to the European crisis. Loan growth in the region was noticeably weak in the fourth quarter of 2011, raising questions about the sustainability of earnings this year should the eurozone crisis haunt global growth prospects.
But Nomura, for example, is bullish, citing a slight uptick in regional manufacturing indices and solid credit growth, in aggregate.
Robert Law, analyst at Nomura, told Emerging Markets:
“HSBC’s 2011 earnings were decent and very similar to our expectations. Going forward, while loan impairment rates are low in Asia generally – suggesting the potential for some normalization going forward that could pressure results – costs are also under control. In short, in an economic soft landing, HSBC’s Asian earnings [which account for three-quarters of HSBC's profits] are likely to be sustained. |
Download these self-congratulatory accolades from the bank’s earnings slides with respect to its Asian ventures. In short, in HK, it's all about retaining market share, capitalizing on China's partial liberalization of its capital account, and maintaining loan growth while not crimping margins. In ex-HK Asia-Pacific, it's about growth, growth, growth.
Further reading:
HSBC upbeat on Asia as profit hits US$22bn - IFR
HSBC India pretax profit jumps 22% to $813 million - Economic Times of India