HSBC Holdings posted an unexpected fourth-quarter loss, its first since at least 2009, as revenue dropped and loans to oil and gas companies drove a jump in impairment charges.
The shares fell as much as 5.4 % as Europe's largest bank reported a pretax loss of $858 million. Excluding one-time items such as a $773 million charge on movements in the fair value of its debt, the lender had a pretax profit of $1.9 billion. Both measures fell short of analysts' estimates.
The result, depressed in part by a drop in profit and loans made in Asia, marks a setback to Chief Executive Officer Stuart Gulliver's efforts to bolster profitability and reverse a share slump. In June, the CEO unveiled a new strategy to boost investment in China, exit unprofitable countries and cut as many as 25,000 jobs to help save as much as $5 billion by the end of 2017.
"Given a demonstrably weaker revenue outlook, we certainly hope for fresh cost reduction initiatives to go well beyond existing targets," said Ian Gordon, an analyst at Investec Plc who has a buy rating on the shares. Without deeper cuts, "a return on equity of more than 10 % is likely to remain elusive -- even by 2018."
Impairments on bad loans and credit-risk provisions increased by 32% to $1.64 billion in the quarter. That took full-year charges to $3.7 billion, exceeding the consensus analyst estimate of $3 billion.
The increase in bad-loan charges in HSBC's wholesale banking division, which accounted for almost $1 billion of loan impairment charges in the quarter, was driven by the oil and gas sector, the company said. HSBC has a "pretty strong" lending book in that industry, as about half of the firm's exposure is to state-owned companies, Gulliver said on a conference call with analysts.
"There is a lot to do to achieve our targets but we have made a good start," Gulliver said in the earnings release. He said HSBC reduced risk-weighted assets by $124 billion last year, taking it almost half-way toward the target for the end of 2017.
While HSBC targets positive "jaws," the difference between the rate of revenue and cost growth, the measure was negative 3.7% for the year. The bank made a 7.2% return on equity, falling short of its target of more than 10%. Revenue in the fourth quarter tumbled 18% to $11.8 billion as net interest income fell to $8.1 billion.
The bank will "only" deploy capital in businesses that hit its return targets, Finance Director Iain Mackay said on a call with analysts. Management remained "very, very focused" on cutting as much as $5 billion in costs, which is a "significant undertaking," he said.
The bank declared a dividend of 21 cents for the fourth quarter, taking the total for the year to 51 cents. That's 1 cent more than last year, maintaining the bank's progressive dividend policy valued by investors.
"Management is on the right track," Martin Gilbert, CEO of Aberdeen Asset Management Plc, the bank's sixth-largest shareholder, said in an e-mail.
Operating costs in the period amounted to $11.5 billion, down from $11.9 billion a year earlier. HSBC cut the annual bonus pool about $100 million to $3.5 billion, as overall employee compensation fell to $19.9 billion from $20.4 billion, according to the annual report. CEO Gulliver had his variable pay for 2015 cut 361,000 pounds ($513,000) to 3 million pounds, reducing his total compensation to the lowest since taking the CEO role in 2011.
The company's end-point common equity Tier 1 capital ratio, a measure of financial strength monitored by regulators, rose to 11.9% from 11.1% a year earlier.
"Maintaining these trends while boosting revenue will be the principal challenge in the year ahead," Gulliver said in the release, as he warned of an "uncertain" economic environment.
Gulliver's task of turning HSBC around has also been complicated by a slowdown in China, a key element of his "pivot to Asia" strategy, which could see as much as $100 billion of risk-weighted assets deployed to the region. HSBC will hire a planned 4,000 over five years instead of three years as a result of the turmoil, Gulliver said on a call with journalists Monday.
"China's slower economic growth will undoubtedly contribute to a bumpier financial environment," Chairman Douglas Flint said in the bank's full-year results release.
U.S. authorities are examining whether the bank hired relatives of well-connected politicians or employees of state-owned businesses in the Asia-Pacific region, HSBC disclosed Monday. Other banks including JPMorgan Chase have said previously that they are facing similar investigations.
Since taking over in 2011 Gulliver has announced more than 87,000 job cuts, exited about 83 businesses and has reduced the bank's sprawling global footprint to 71 countries and territories from 88.
The CEO reiterated Monday he expects to finalize the sale of operations in Brazil in the first half of the year, despite the country's antitrust regulator ordering HSBC to disclose all the offers it received in the past two years for its local unit and explain why it picked Banco Bradesco SA's $5.2 billion bid.
Underscoring the difficulty of selling bank assets, HSBC also said it will retain and restructure its unprofitable Turkish unit. The bank had received a number of offers for the business since June, none of which "were deemed to be in the best interests of our shareholders," Gulliver said.
Gulliver said last week the lender would probably move about 1,000 investment bankers to Paris if Britain withdraws from the European Union. Flint said Monday that so-called Brexit won't reopen discussions on the firm's decision to keep its headquarters in the U.K. The country will hold an in-out referendum on quitting the 28-nation bloc on June 23.