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Why are HSBC's shares soaring despite gloomy results? The City is buying its rosy view of 'the truth'

The bank has a host of problems, but it's keeping up with City expectations so its stock has been in demand on the markets

James Moore
Wednesday 03 August 2016 14:36 BST
HSBC boss Stuart Gulliver is putting a positive spin in the bank's results
HSBC boss Stuart Gulliver is putting a positive spin in the bank's results (AFP)

“There’s the truth,” Lionel Hutz, The Simpsons’ much-missed ambulance-chasing lawyer, said in a gloomy tone during one memorable episode. “And there’s the truth,” he continued, adding a bit of sunshine to his voice and adopting a cheery smile. He was, at the time, posing as a sleazy agent so you can guess where the plot was going.

Here’s the first version of Lionel’s truth when it comes to HSBC. The bank has produced a rotten set of results by its standards. First half profits fell by 29 per cent to $9.7bn (£7.3bn). The 2017 target for achieving a 10 per cent return on equity - a measure of profitability banks like to use even though they probably shouldn’t - has been quietly dropped. By comparison, boring old Lloyds Banking Group turned in 14 per cent.

China’s slowdown and Brexit have hit the outlook for the future with a double whammy.

Oh, and did I forget to mention the pages and pages of legal warnings at the end of the results. Some of the issues they raised are going to bite.

The authorities in the US, Belgium, France, Argentina and India are all investigating allegations of tax evasion, or fraud, or both, that have been levelled against its Swiss private banking unit.

HSBC has also “received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co”. That’s the law firm at the heart the “Panama Papers” which detailed attempts by wealthy individuals and corporations to keep their money away from the prying eyes of the tax authorities. The impact on HSBC “could be significant”. Ouch.

The US monitor overseeing the bank’s compliance with money laundering regulations has also raised “issues” that the US Department of Justice and HSBC are “reviewing further”. Oops.

And there's a lot more besides.

One conclusion that could be drawn from reading through the vast tome HSBC puts out when it releases its financials is that its globe-trotting business model is showing signs of strain. A surprising share buyback, funded by the disposal of the Brazilian business, is just a spoonful of sugar to make some nasty medicine go down. But management is giving with one hand and taking with the other. The dividend will not rise for the foreseeable future.

On the flip side of the coin, however, there is the second sunnier “truth”. This one holds that there were at least no nasty surprises in the results. While profits were down, they were at least ahead of the City’s consensus forecast. The dividend might not rise for the foreseeable future, but neither should it fall as many analysts had feared. And the bank’s brutal cost cutting is yielding results.

UBS was moved to issue a note entitled “Wait, what? A buyback?. “HSBC is a diversity and yield play in our view. We expect a positive reaction,” its analysts opined.

Chief executive Stuart Gulliver even said the bank had managed to “capture market share” in “a number of areas”.

Always look on the bright side of life, dee dum…

That’s what the markets did. The shares, already on their uppers thanks to HSBC's status as a dollar company, were sprightly performers upon the opening of the London Stock Exchange.

Of course a grumpy old cynic like me is going to opt for the first story I outlined above. The gloomy version of Lionel Hutz's “the truth”. This house is rundown and there are worms in the walls.

But you can bet that the members of HSBC’s remuneration committee will go for the second version when it comes to their consideration of executives' bonuses. They usually do.

Consider, if you will, the following statement by HSBC chairman Douglas Flint. “Amid a turbulent period, nothing cast doubt on the strategic direction and priorities we laid out just over a year ago,” he declared.

What HSBC is saying is: “We’re doing the right thing and if it goes wrong it’s not our fault.”

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