HSBCs(LSE: HSBA) (NYSE: HSBC.US) first-half results showed that, despite the banks size and global footprint, growth remains elusive.
For the most part, this lack of growth and falling profitability can be traced back to the banks rising cost base.
Indeed, for the first half of the year HSBC reported that underlying group operating expenses ticked higher by 4%, to $18.2bn. This growth was driven by rising compliance and risk management spending, which jumped 20% year on year.
Over the same period, HSBCs sales contracted as the bank pulled out of some non-essential, high risk markets. Underlying revenues fell 4% during the second quarter of this year.
Falling profits
Rising costs and falling sales only mean one thing, contracting profit margins and falling profits. HSBCs second quarter pre-tax profit fell to $12.3bn, 12% lower than the $14.1bn the bank earned during the first six months of last year. Overall, HSBCs first-half earnings per share dropped nearly 10%, to $0.50.
Unfortunately, these figures suggest that HSBC will have a hard time meeting current earnings targets City analysts have pencilled in for the bank.At present, the City is forecasting 6% earnings growth for the bank this year although with earnings down 10% during the first half, things are not looking good.
Look to the long-term
Still, while HSBCs earnings are coming under pressure now, the bank is uniquely positioned to profit over the next few decades. In particular, HSBCs management and the banks analysts believe that by 2050, the worlds top 30 economies those in Asia-Pacific, Latin America, the Middle East and Africa will have grown four-fold.
HSBCs global footprint and network puts the bank in great position to profit from this growth. Indeed, with trading floors, local offices and management teams located within almost every major economy around the world, HSBC is one of the few global banks that can negotiate international trade deals internally without getting involved with third parties.
Then theres HSBCs wealth management arm, which will play another key part in the banks long-term growth plan. For example, the creation of wealth and the ultra-wealthy is growing at aphenomenal rate with China leading the charge. According to Forbes, during 2014 the number of self-made billionaires within China hit 152, up 25% from the figure of 122 reported last year.
Last resort
As a last resort, if HSBC fails to benefit from global economic growth then the bank can always buy back its own shares, a strategy that has been discussed by management before. While buybacks are not everyones cup of tea, they are a useful tax-efficient tool for increasing earnings per share. If HSBC really is struggling to grow, buybacks could be a great tool.
So, HSBC is a great play on global growth but before you make a decision to buy, sell, or hold, I recommend that you do some further research.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
