Stock Market Review - HSBC's results: Further evidence of a robust local banking system
Last Friday, HSBC Bank Malta plc issued its financial results for the full year to December 31, 2008. Although profitability dropped by 16.2 per cent to €96.1 million, many international bankers would be envious of such a resilient performance and...
Last Friday, HSBC Bank Malta plc issued its financial results for the full year to December 31, 2008. Although profitability dropped by 16.2 per cent to €96.1 million, many international bankers would be envious of such a resilient performance and healthy capital ratios. This is also further testimony of the robustness of the local banking system. The strength of Malta's financial system has been in evidence throughout the recent global crises and this was also supported by the ranking afforded by the World Economic Forum.
Malta's banking system was ranked as the world's 10th soundest, as the World Economic Forum Global Competitiveness report gave Maltese banks a score of 6.6 out of a maximum of 7. This enviable result vindicates the claims by government representatives and other columnists that local banks are safe and not experiencing liquidity problems.
The main highlights of HSBC's results are:
Net interest income down 2.5 per cent to €123 million; fee and commission income up 2.5 per cent to €31.8 million;
Profitability of life insurance business up 25 per cent;
Profit after tax of €63.1 million (-17.3 per cent);
Loans and advances up 10 per cent to €3.1 billion; deposits up one per cent to €3.4 billion;
Return on equity of 22.3 per cent;
Total dividend of €0.215 per share; gross yield of 9.6 per cent.
HSBC reported that its main source of revenue, interest income, edged 2.5 per cent lower to €123 million as increased interest receivable following the rise in loans and advances to customers was offset by higher interest payable on deposits due to a more competitive landscape.
Moreover, the aggressive interest rate cuts by the European Central Bank during the final quarter of the year negatively impacted the bank's interest income due to the immediate re-pricing of lower interest on loans and a more lagged effect on interest payable on time deposits.
This margin compression is expected to persist throughout the course of 2009 following further interest rate cuts by the ECB since the start of this year and possibly more to follow during the year. Meanwhile, net fee and commission income rose by 2.5 per cent to €31.8 million.
Overall, HSBC's revenue in 2008 declined by €10.5 million mainly as a result of a lower foreign exchange income (€8.8 million) together with a €3.2 million decrease in interest income and a €1 million drop in profit on sale of securities.
On the other hand, increased income from card usage and life insurance activities helped to offset the decline from other revenue sources. Furthermore, HSBC's income in 2008 was also positively impacted by gains from property disposals and a property revaluation to the tune of €3.5 million.
Operating expenses increased by 8.1 per cent to €90.4 million but the cost to income ratio remained healthy at 48 per cent. Staff costs and benefits increased by €5.6 million primarily due to exceptional charges related to voluntary early retirement schemes while the €1 million rise in administrative expenses mainly relates to one-off costs related to the euro conversion and investment in IT. HSBC explained that excluding such costs, overall expenditure remained flat over the previous year.
Although HSBC retains a strict cost control discipline in place, the CEO argued that costs will not be reduced if this would have a negative effect on the service to customers.
During the year HSBC recognised an impairment provision of €1.9 million. This was as a result of a slower pace of recoveries compared to the previous year and not due to a deterioration in the quality of their loan book. An important indicator of the credit quality of the loan book is the ratio of non-performing loans to total loans.
This improved to a record level of just 2.3 per cent. While there was no evidence of a deterioration in the quality of the bank's lending book during the year, CEO Alan Richards admitted that in 2009 impairments are likely to increase as pressure is building up in certain sectors of the economy.
However, HSBC is not overly concerned at the current situation and maintains its loan book is in good shape.
Loans and advances to customers increased by 10.3 per cent (€289.9 million) during the year to €3.1 billion while customers' deposits edged minimally lower to €4 billion although deposits from other banks climbed to over €460 million from just €87 million in December 2007.
HSBC's loan to deposit ratio increased to 77 per cent as at December 3, 2008. This implies that for every €100 in deposits, HSBC Malta has loans of €77 while the balance of €23 is in the form of financial investments. In other words, the local outfit does not depend on borrowings from other banks to fund its business.
This is in contrast to many of the foreign banks which had loan to deposit ratios in excess of 100 and were therefore very much dependent on inter-bank lending to carry out loans to its customers.
Hence when banks stopped lending to each other in the aftermath of the collapse of Lehman in September 2008, many banks were unable to lend to customers. This was effectively the start of the credit crunch.
HSBC's income statement did not reflect the €9.7 million "mark-down" in their investment portfolio since HSBC records such movements in the balance sheet.
Mr Richards revealed that circa 10 per cent of the bank's surplus liquidity is invested in high-grade corporate bonds with over 90 per cent of the portfolio in securities rated A+ and above. The CEO believes that their investment-grade instruments will be re-valued accordingly over time as volatility in financial markets subsides.
HSBC Malta recommended the payment of a final gross dividend of €0.096 per share (€0.062 net of tax) for approval during the Annual General Meeting due to be held on April 1. The total dividend in respect of the financial year amounts to €0.215 (gross), representing a payout ratio of 65 per cent. In July 2008, the CEO had indicated that HSBC would be reviewing the aggressive dividend payout adopted in the previous three years but the directors remain of the opinion that any cash surplus to their requirements should be returned to shareholders. Overall, the 2008 dividend is 29 per cent lower than of the previous year but based on Tuesday's closing price of €2.24, the total dividend for the year represents a gross yield of 9.6 per cent, a healthy return when viewed against the current low interest rate scenario.
Although the CEO warned that 2009 will be a particularly challenging year in view of the expected reduction in revenue resulting from generally lower economic activity and likely increase in impairments, Mr Richards stressed that HSBC Malta is in very good shape and well placed to weather the financial storm. Mr Richards explained that local banks have conservative loan to deposits ratios which has helped the industry in the current economic crisis.
Shareholders should therefore look beyond the downward trend in profitability and should feel confident that HSBC will be well placed to return to profit growth as the overall economic environment improves.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd. RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
http://www.rfstockbrokers.com
Malta's banking system was ranked as the world's 10th soundest, as the World Economic Forum Global Competitiveness report gave Maltese banks a score of 6.6 out of a maximum of 7. This enviable result vindicates the claims by government representatives and other columnists that local banks are safe and not experiencing liquidity problems.
The main highlights of HSBC's results are:
Net interest income down 2.5 per cent to €123 million; fee and commission income up 2.5 per cent to €31.8 million;
Profitability of life insurance business up 25 per cent;
Profit after tax of €63.1 million (-17.3 per cent);
Loans and advances up 10 per cent to €3.1 billion; deposits up one per cent to €3.4 billion;
Return on equity of 22.3 per cent;
Total dividend of €0.215 per share; gross yield of 9.6 per cent.
HSBC reported that its main source of revenue, interest income, edged 2.5 per cent lower to €123 million as increased interest receivable following the rise in loans and advances to customers was offset by higher interest payable on deposits due to a more competitive landscape.
Moreover, the aggressive interest rate cuts by the European Central Bank during the final quarter of the year negatively impacted the bank's interest income due to the immediate re-pricing of lower interest on loans and a more lagged effect on interest payable on time deposits.
This margin compression is expected to persist throughout the course of 2009 following further interest rate cuts by the ECB since the start of this year and possibly more to follow during the year. Meanwhile, net fee and commission income rose by 2.5 per cent to €31.8 million.
Overall, HSBC's revenue in 2008 declined by €10.5 million mainly as a result of a lower foreign exchange income (€8.8 million) together with a €3.2 million decrease in interest income and a €1 million drop in profit on sale of securities.
On the other hand, increased income from card usage and life insurance activities helped to offset the decline from other revenue sources. Furthermore, HSBC's income in 2008 was also positively impacted by gains from property disposals and a property revaluation to the tune of €3.5 million.
Operating expenses increased by 8.1 per cent to €90.4 million but the cost to income ratio remained healthy at 48 per cent. Staff costs and benefits increased by €5.6 million primarily due to exceptional charges related to voluntary early retirement schemes while the €1 million rise in administrative expenses mainly relates to one-off costs related to the euro conversion and investment in IT. HSBC explained that excluding such costs, overall expenditure remained flat over the previous year.
Although HSBC retains a strict cost control discipline in place, the CEO argued that costs will not be reduced if this would have a negative effect on the service to customers.
During the year HSBC recognised an impairment provision of €1.9 million. This was as a result of a slower pace of recoveries compared to the previous year and not due to a deterioration in the quality of their loan book. An important indicator of the credit quality of the loan book is the ratio of non-performing loans to total loans.
This improved to a record level of just 2.3 per cent. While there was no evidence of a deterioration in the quality of the bank's lending book during the year, CEO Alan Richards admitted that in 2009 impairments are likely to increase as pressure is building up in certain sectors of the economy.
However, HSBC is not overly concerned at the current situation and maintains its loan book is in good shape.
Loans and advances to customers increased by 10.3 per cent (€289.9 million) during the year to €3.1 billion while customers' deposits edged minimally lower to €4 billion although deposits from other banks climbed to over €460 million from just €87 million in December 2007.
HSBC's loan to deposit ratio increased to 77 per cent as at December 3, 2008. This implies that for every €100 in deposits, HSBC Malta has loans of €77 while the balance of €23 is in the form of financial investments. In other words, the local outfit does not depend on borrowings from other banks to fund its business.
This is in contrast to many of the foreign banks which had loan to deposit ratios in excess of 100 and were therefore very much dependent on inter-bank lending to carry out loans to its customers.
Hence when banks stopped lending to each other in the aftermath of the collapse of Lehman in September 2008, many banks were unable to lend to customers. This was effectively the start of the credit crunch.
HSBC's income statement did not reflect the €9.7 million "mark-down" in their investment portfolio since HSBC records such movements in the balance sheet.
Mr Richards revealed that circa 10 per cent of the bank's surplus liquidity is invested in high-grade corporate bonds with over 90 per cent of the portfolio in securities rated A+ and above. The CEO believes that their investment-grade instruments will be re-valued accordingly over time as volatility in financial markets subsides.
HSBC Malta recommended the payment of a final gross dividend of €0.096 per share (€0.062 net of tax) for approval during the Annual General Meeting due to be held on April 1. The total dividend in respect of the financial year amounts to €0.215 (gross), representing a payout ratio of 65 per cent. In July 2008, the CEO had indicated that HSBC would be reviewing the aggressive dividend payout adopted in the previous three years but the directors remain of the opinion that any cash surplus to their requirements should be returned to shareholders. Overall, the 2008 dividend is 29 per cent lower than of the previous year but based on Tuesday's closing price of €2.24, the total dividend for the year represents a gross yield of 9.6 per cent, a healthy return when viewed against the current low interest rate scenario.
Although the CEO warned that 2009 will be a particularly challenging year in view of the expected reduction in revenue resulting from generally lower economic activity and likely increase in impairments, Mr Richards stressed that HSBC Malta is in very good shape and well placed to weather the financial storm. Mr Richards explained that local banks have conservative loan to deposits ratios which has helped the industry in the current economic crisis.
Shareholders should therefore look beyond the downward trend in profitability and should feel confident that HSBC will be well placed to return to profit growth as the overall economic environment improves.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd. RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
http://www.rfstockbrokers.com