Things seem to be going from bad to worse at HSBC (LSE: HSBA) (NYSE: HSBC.US). We already knew that 2014 was a tough year for the bank as fines, settlements and UK customer redress all took their toll on group profits.
However, it now looks as if these headwinds are going to continue on into 2015 and beyond.
A terrible year
2014 really was a terrible year for HSBC. The bank was forced to pay out billions in fines and settlements and, as a result, it had to beef up its legal and regulatory compliance divisions.
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Unfortunately, the extra demand for staff push up the group’s costs, undoing much of the cost-cutting work completed over the past five years.
HSBC’s cost-income ratio — a closely watched measure of efficiency — jumped to 67.3% during 2014. Management had been targeting at cost-income ratio in the mid-50s by 2016.
Moreover, HSBC’s return on equity fell to 7.3% during 2014, down from 9.2% the year before and the group’s tier one capital ratio only ticked higher by 0.1%, from 10.8% up to 10.9%.
Gloomy outlook
HSBC’s chief executive Stuart Gulliver has called 2014 “a challenging year”, which seems to be an appropriate assessment of the situation. Nevertheless, it looks as if HSBC’s management is preparing for yet another challenging year ahead.
The bank’s outlook statement offered little in the way of hope for HSBC’s shareholders. Management warned that there are a number of uncertainties and challenges facing the bank during 2015, most of which are outside of HSBC’s control. A thinly veiled warning that shareholders should not expect HSBC’s fortunes to improve any time soon.
Value trap
It is clear that HSBC is in crisis mode. Almost all of management’s performance targets have now been missed and there’s no guarantee that the bank will be able to stabilise itself and return to growth in the short term.
Some analysts are also now starting to question the sustainability of HSBC’s dividend payout. And management isn’t doing anything to reassure investors on this front. In particular, the bank warned on Monday that:
“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…”
Once again, an ominous-sounding statement that sounds like a warning, rather than a commitment to the payout.
Indeed, after announcing a 17% fall in pre-tax profit on Monday, the above statement implies a dividend cut could be on the cards as the dividend moves in line with overall group profitably.
What’s more, it’s now impossible to try and value HSBC. City figures suggest that the bank is trading at a forward P/E of 10.4 but based on today’s numbers, this figure is likely to be revised downwards.
Then there are the uncertainties and challenges currently facing the bank, which make City forecasts unreliable. For example, City analysts overstated HSBC’s full-year 2014 results by an average of 21%, which highlights the level of uncertainty investors now face.
Foolish summary
So overall, as things go from bad to worse at HSBC, I’d argue it could be time to sell the bank and look elsewhere for deals.
