HSBC Bounces Back In Q1

In its first quarter trading update, HSBC Holdings plc (HBC) noted that underlying pretax earnings, excluding $6.6 billion in fair value gains on its own debt, fell from the level earned in the year-ago quarter, but were substantially higher than that reported in 2008’s fourth quarter.

Results were buttressed by record earnings in Global Banking and Markets (GBM), aided by strong trading results in foreign exchange and interest rates, as well as a substantial decline in write-downs on legacy credit trading positions.

However, pretax earnings in Personal Financial Services (outside of the US) and in Commercial Banking were lower than the prior-year quarter due to lower deposit spreads and higher loan impairment charges.

Loan impairment charges and other credit risk provisions rose in 2009’s first quarter relative to last year’s first quarter in all customer  groups and regions, with roughly one-half of the increase stemming from Personal Financial Services, largely due to continuing weakness in the US.

HSBC strengthened its balance sheet through a 5-for-12 rights issue in April 2009, adding $17.8 billion in new equity capital. Pro forma for this new equity, HSBC’s Tier 1 capital ratio was 9.9% at March 31, 2009, compared to 8.3% at the end of December 2008.

While HSBC cut its first quarter dividend year over year by 56% to $0.08 ($0.40 per ADS), it is the only major UK bank that still pays a common dividend.

We have a Hold recommendation on HBC and note that the current Zacks’ rank is 5, indicating near-term selling pressure on the shares.

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