Europe's largest bank, HSBC, misses expectations in 2018 earnings

Key Points
  • HSBC, headquartered in London, reported full-year earnings on Tuesday.
  • The largest bank in Europe says 2018 reported pre-tax profit was $19.89 billion, up 15.9 percent from a year ago.
  • Reported revenue last year was $53.78 billion, 4.5 percent higher than 2017. 
We are starting to be cautious on growth: HSBC
We are starting to be cautious on growth: HSBC

HSBC, Europe's largest bank, on Tuesday delivered a financial report card that missed expectations on several fronts following a challenging fourth-quarter when markets globally experienced a sharp sell-off and reduced activity.

The bank's reported pre-tax profit for the whole of 2018 was $19.89 billion, 15.9 percent higher than the previous year. Reported revenue last year was $53.78 billion, 4.5 percent higher than 2017.

The London-headquartered bank was expected to record a 23.8 percent jump in reported pre-tax profit to $21.26 billion for 2018, according to forecasts compiled by Refinitiv. Revenue for the year was projected to be 6.28 percent higher at $54.674 billion, data by Refinitiv showed.

HSBC logo is displayed outside a branch of in the United Kingdom.
Matt Cardy | Getty Images

HSBC said it will pay a full-year dividend of $0.51 per share, but did not announce a new share buy-back plan as some analysts had hoped.

HSBC will continue to invest heavily in 2019, CFO says
HSBC will continue to invest heavily in 2019, CFO says

The bank's Hong Kong-listed shares fell by around 2 percent after the lunch break.

Other financial metrics that analysts and investors were watching:

  • Net interest margin, a measure of lending profitability, was 1.66 percent as of Dec. 31, 2018. That's higher than the 1.63 percent seen a year ago.
  • Earnings per share for 2018 was $0.63, higher than $0.48 a year ago.
  • Common equity tier 1 ratio — a proportion of the bank's core capital to assets — as at Dec. 31 last year was 14 percent, compared to 14.5 percent at end-2017.

Despite missing forecasts, HSBC Group Chief Financial Officer Ewen Stevenson said he was "very pleased" with the latest set of results. He added that the difficult trading environment at the end of 2018 resulted in lower fourth-quarter revenue compared to the previous three months.

Stevenson was referring to the sharp sell-off in global markets in the fourth-quarter last year, which led to trading revenue losses in many banking groups.

"We were very much hit by adverse markets in November and December, which meant that we saw revenue drop by about a billion dollars relative to [the third-quarter]," Stevenson told CNBC's Joumanna Bercetche on Tuesday.

The lower-than-expected revenue growth also resulted in HSBC missing its positive "jaws" target for 2018. The jaws ratio is positive when revenue grows faster than costs. HSBC's jaws for the year was minus 1.2 percent.

"We were very disappointed to have missed that jaws target for the year," the CFO said, adding that the bank will continue to work toward achieving a positive jaws ratio in 2019.

Outlook in Europe and Asia

On business outlook, Stevenson said HSBC is "very well-prepared" for whatever the outcome is on Britain's plan to leave the European Union. He noted that the bank had previously talked about moving up to a thousand employees to France — including new hires and transfers from London — and will continue to evaluate the circumstances surrounding Brexit.

The CFO also said the bank — which derives much of its revenue in Asia, particularly in Greater China — hasn't seen any "dramatic slowdown" in its business as a result of the U.S.-China trade tensions.

Even then, some investors are concerned about the headwinds facing HSBC. Kenny Wen, wealth management strategist at Hong Kong-based financial services firm Everbright Sun Hung Kai, said before the bank's earnings release that he was not in a rush to buy HSBC shares.

We are very well prepared for Brexit: HSBC
We are very well prepared for Brexit: HSBC

"Even though the dividend yield is attractive ... there are several headwinds ahead in the market," Wen told CNBC's "Squawk Box" on Tuesday. He cited Brexit, slowing global growth and the U.S.-China trade fight as key challenges that HSBC has to navigate.

"A high portion of revenue and profit come from Hong Kong and China. So, if global or China GDP slows down ... it will hurt market sentiment as well as earnings growth. And don't forget the trade war between Washington and Beijing," added Wen. "I think given the headwinds ahead, HSBC shares will just be weight-traded unless we have a very positive results today."