This article has been adapted from Fool U.K. , our sister site across the pond.
Lower loan losses
The U.K.'s biggest bank saw its net operating income (before credit provisions) fall 5% to just over $17 billion (10.4 billion pounds).
However, as with other banks, HSBC's profitability was boosted by lower loan losses, down 37% to under $2.4 billion. Despite this improvement, underlying profit before tax fell 10% to $5.5 billion.
Up to this point, HSBC's results look fairly mundane -- even disappointing. However, this is where the bank's massive losses in U.S. subprime lending finally come good. Have a look at the table below:
|Underlying profit before tax||5.5||6.1|
|Profit after tax||4.4||2.9|
|Effective tax rate||20%||52%|
As you can see, HSBC's after-tax earnings were boosted mightily by a much lower tax bill. As a result of this tax windfall, the mega-bank's earnings per share (EPS) climbed an impressive 53% to 23 cents per share.
This rise in earnings enabled HSBC to hike its quarterly dividend from eight to nine cents per share, a rise of 12.5%.
Two flies in the ointment
One concern for HSBC's owners should be the large increase in the cost of running the bank. Operating expenses leaped a sixth (17%) to nearly $10.4 billion. As a result, the bank's cost/income ratio shot up to almost 61%, from under 50% a year ago.
HSBC attributes this cost hike to "continued investment in our businesses in the faster-growing markets and in Global Banking and Markets." In other words, more high-priced bankers!
Also, HSBC has started to make provisions to compensate customers for the bank's mis-selling of payment protection insurance (PPI). However, HSBC's initial PPI provision of $440 million is a mere fraction of the 3.2 billion pounds set aside last Thursday by Lloyds Banking Group
This morning, Barclays
In its London listing, the consensus 2011 forecast is for HSBC to produce EPS of 57.8p and an annual dividend of 26p. Based on a share price of 644p, these give a price-earnings ratio of 11 and a dividend yield of 4%, covered 2.2 times.
These are undemanding ratings for a bank with global reach and scale, as well as heavy exposure to emerging markets. Hence, I'd be happy to own shares in HSBC.
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