What's going on?
Europe’s largest bank, HSBC, sounded yet another alarm for the global economy on Tuesday as it reported weaker-than-expected annual results.
What does this mean?
HSBC grew its revenue and profit last year, but not by as much as investors predicted. In Asia, where HSBC makes 90% of its profit, slowing Chinese economic growth and falling stock markets (which hurt earnings at other banks, too) led to lower fourth-quarter profit than a year ago (tweet this) – and contributed to global costs growing faster than revenues.
Closer to its UK home, HSBC also reported fewer loans were being repaid as agreed – and predicted British economic uncertainty might make this worse. HSBC has a reputation for avoiding risky loans, so if even its carefully chosen borrowers are flirting with default, other British banks may take a bigger hit.
Why should I care?
For markets: No buyback to quieten the dissenters.
Disgruntled investors sold HSBC down 4% on Tuesday, making it the worst performer on the UK stock market. That likely reflects their disappointment at both lower-than-forecast profit and HSBC’s view that ongoing geopolitical uncertainty is clouding the future of its two key markets: the UK and Asia. Some hoped HSBC would announce a fresh share buyback program, as reducing the number of publicly available shares would improve returns for remaining shareholders. But it didn’t – disappointing investors, especially as rival RBS announced a larger-than-expected payday for its own shareholders last week.
The bigger picture: Chinese banks are becoming a little more European.
In China, where much of HSBC’s Asian business originates, local commercial banks are considering following in the state-owned Bank of China’s footsteps by issuing bonds with no set repayment date – a.k.a. “perpetual bonds” – in order to shore up their cash balances. European banking giant Santander offers similar bonds, but controversially declined to buy them back recently – which could push up the interest rates investors demand of Chinese banks.