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OVER EUROPE: HSBC LESS FRAGILE THAN YOU THINK

Simon Nixon

DOW JONES NEWSWIRES

To judge the results of HSBC Holdings (HSBA. LN), it must be remembered that the bank has a new management team and Douglas Flint and Stuart Gulliver may have decided to unpack some bad news early in their mandate so that their performance is best judged by the result.

British banking giant has announced that under a fiscal 2010 profit before tax lower than expected, to 19.1 billion dollars, and a downward revision to 12% -15% of its target return on equity, against 15-19% previously, to reflect new regulatory requirements.

necessarily Investors reacted badly to the announcement and the stock has lost 5%. Yet, those who tend to see the glass half full see that HSBC is one of the most promising banks in Europe.

course, the annual results do not contain bad news. The charges for bad debts were in fact found to be less than expected, particularly in the U.S., where HSBC has finally made a profit. The problem is the 6% drop in net profit, while weak loan growth did not offset the slowdown in investment banking, and that wage inflation in Asia has increased the coefficient operation of the bank over its goal of 55%.

Accordingly, the return on equity of 9.5% fell below the cost of bank capital.

Still, the new performance target could be explained by an attempt to manage expectations of investors. HSBC said that its core Tier 1 ratio of 10.7% Current lose up to 3 percentage points under Basel III. The bank has not really give any details beyond the fact that this impact is attributable to two-thirds to a higher risk weighting, which should be easier to compensate. The new CEO Stuart Gulliver also promises to reduce costs through consolidation of the administrative structure of the group.

Meanwhile, HSBC has a significant growth potential. The loan to deposit ratio of just 80% of the bank makes it very sensitive to interest rates and an increase of one percentage point in interest rates would boost its U.S. and UK results net $ 3 billion, according to estimates by Morgan Stanley.

These excess deposits are also a source of inexpensive financing. HSBC may well increase its lending to 150 billion dollars - more than double the increase recorded in 2010 - while continuing to meet its target of loan to deposit ratio of 90%.

Given the current ratio of book value of 1.3 quoted by the British bank, the market clearly can not believe that HSBC can generate returns shown in the top of its new range of targets. And the new group's leaders have ensured that this does not change before the day Meeting with investors in May. There is no doubt that it suits them very well.

Simon Nixon, Dow Jones Newswires

(French version Maylis Jouaret)

(END) Dow Jones Newswires

March 01, 2011 10:04 ET (15:04 GMT)