Shares of HSBC (LSE: HSBA) (NYSE: HSBC.US) fell as much as 6% in early trading this morning, after the company released disappointing annual results.
The FTSE 100 banking giant reported a 17% dive in profit before tax in 2014 to $18.7bn. Fines, settlements and UK customer redress all took their toll in what chief executive Stuart Gulliver called a challenging year.
While the company said that on an underlying basis profit was broadly unchanged from 2013, and reported lower impairment charges and a small uptick in its common equity tier 1 capital ratio, the results were disappointing overall and below market expectations.
Return on equity was particularly disappointing at 7.3%, compared with 9.2% in 2013, and while management reported a number of encouraging signs in some areas of its business, the market seems to have taken the gloomiest parts of the companys outlook statement to heart:
It is impossible not to reflect on the very broad range of uncertainties and challenges to be addressed in 2015 and beyond, most of which are outside our control, particularly against a backdrop of patchy economic recovery and limited policy ammunition.
The company recited a litany of issues that could materially affect its trading going forward: geopolitical tensions, eurozone membership uncertainties, political changes, currency and commodity price realignments, interest rate moves and the effectiveness of central banks unconventional policies to name but a few[!].
HSBCs shares have been weak for some time, and this mornings fall to a 52-week low of 570p seems to confirm the markets view that the consensus analyst outlook on the companys earnings and dividends has been over-optimistic, and that forecasts will have to be revised down.
As things stand, at a share price of 570p, the forecasts ahead of todays results put HSBC ostensibly in bargain territory: a P/E of 9.6 for 2015 falls to 8.9 for 2016, while a dividend yield of 6.2% rises to 6.8%. I think well be seeing plenty of analysts taking the red pen to their forecasts.
HSBCs dividend yield has been a big draw for investors for some time, but the meagre 2% rise to 50 cents announced in todays results was below consensus expectations of 51.2 cents.
Furthermore, while the company restated its commitment to grow the dividend, there was a somewhat ominous-sounding caveat from management:
To be clear, the progression of dividends should be consistent with the growth of the overall profitability of the Group and is predicated on our ability to meet regulatory capital requirements in a timely manner. These targets offer a realistic reflection of the capabilities of HSBC in the prevailing operating environment.
The question for investors today is: does the share price adequately discount the outlook for earnings and the risk of a dividend cut? I think it does, but it can only be a gut call, given the multitude of uncertainties facing the bank.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.