A Very Quick Look at HSBC's Earnings

LONDON -- Right now I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.

You see, many companies these days report "underlying" earnings, which are calculated by excluding costs the firm deems to be "exceptional." Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.

Today I'm looking at HSBC (LSE: HSBA.L  ) (NYSE: HBC  ) to see if its reported earnings have been distorted significantly by exceptional, one-off, or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:

Year to 31 December

2007

2008

2009

2010

2011

Profit before unusual items 11,556 12,023 4,088 12,014 14,261
Goodwill impairment 0 (7,251) 0 0 0
Gain on sales of assets and investments 549 1,678 0 0 0
Restructuring charges 0 0 0 0 (209)
Other charges 0 0 309 156 0

Note: All figures in millions of pounds.

While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.

So between 2007 and 2011, my stats tell me HSBC reported cumulative profits before exceptional items and tax of 53.9 billion pounds. However, aggregate exceptional costs came to 4.8 billion pounds -- equivalent to a 9% of cumulative "underlying" profits.

The main exceptional charge was a massive goodwill write-off in 2008, relating to its household credit business in the U.S. As it turned out, this sub-prime related write off was a merely a sign of what was to come, with bank profits around the globe plummeting the following year.

Even HSBC, regarded as one of the safest and most conservatively run banks in the world, saw its underlying profits fall by two-thirds in 2009.

This huge hit apart, HSBC has a better record than most when it comes to one-off costs charged against its profits. It made profits on the sale of assets and investments in both 2007 and 2008, and took just one restructuring charge of just over 200 million pounds last year.

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Stuart does not own any share mentioned in this article.

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