Waiting for re-rating

HSBC faces long march to unlock value

HSBC is on a long march to win round investors. The global bank's first-half results beat expectations, and the sale of its Brazilian unit brought in a pleasing $5.2 billion. Nevertheless, there are few immediate catalysts for unlocking value.

Enthusiasm for Chinese stocks helped boost revenue in Hong Kong, HSBC's biggest territory, in the first six months of 2015, while bad debt charges declined. But adjusted costs were seven per cent higher than in the same period of 2014, while the bank set aside another $1.1 billion for fines and settlements, mainly for rigging foreign exchange rates.

Judging by HSBC's soggy share price, shareholders are pretty sceptical about the bank's latest targets, unveiled in June. Still, the latest figures show Chief Executive Stuart Gulliver notching up some early progress. HSBC carved some $50 billion off risk-weighted assets - four per cent of the bank's balance sheet at the end of 2014 - and pumped about half that sum into new lending.

Selling the underperforming Brazilian business to rival Bradesco for 1.8 times its June 2015 tangible book value is another win. HSBC's Turkish unit is likely to follow soon. These disposals will further boost the bank's common equity Tier 1 capital ratio, which was a robust 11.6 per cent at the end of June.

However, HSBC's plans to cut costs and further shrink its balance sheet will take several years to bear fruit. Combined with the recent stock market selloff in China, that may explain why HSBC shares trade at a discount to book value, despite the bank achieving a 10.6 per cent annualised return on equity in the first half and promising investors a forward dividend yield of around 5.5 per cent. Even the possibility of shifting the $178 billion bank's headquarters is unlikely to provide much short-term excitement, as leaving London would probably force funds that track the FTSE 100 index to sell their shares.

HSBC executives say that once the bank has finished shrinking its balance sheet, it should be able to return some capital to shareholders. Even then, investors will probably have to wait until the end of 2016. In the meantime, they have little choice but to keep trudging along.