Economic Events Blamed For HSBC Holdings PLC (ADR) (HSBC)’s Disappointing Earnings

The earning season for banks in Europe started out with some disappointing numbers. $4.2 billion in net losses are reported by banking giant HSBC Holdings plc (ADR) (NYSE:HSBC) in the fourth quarter of 2016. Unfortunately this comes after a $2.4 billion dollar write down of its private banking operations in Europe.

As the largest bank by assets in Europe, HSBC only made a pre-tax profit of $7.1 billion in 2016. This is disappointing news for investors as the analysts’ estimates came in at $14.4 billion. Its actual profit is also down quite a lot from $18.9 billion in the previous year, according to Thomson Reuters data. The company also took a loss of $1.5 billion in the 4th quarter of 2015. So it has not been a very good couple of years for the large bank. It appears that HSBC is having a difficult time shrugging off a bad reputation linked to accusations of working with arms dealers, tax evaders, and foreign dictators. It disclosed it was under investigation by Britain’s Financial Conduct Authority into its compliance with money laundering regulations.

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On top of all this trouble it’s already facing, HSBC Holdings plc (ADR) (NYSE:HSBC) has also experienced political and economic shocks as have many other financial institutions. It’s already planning to move roughly one thousand jobs out of London and possibly transfer most of them to Paris, France. Donald Trump’s victory in the US presidential election has also caused many companies to take action based on what they think his economic and international trade policies will look like. What all this means for HSBC is uncertainty and volatility. Its shares were trading down about 5% in the Hong Kong stock market after HSBC published the latest financial numbers.

But perhaps the worst is behind it. HSBC Holdings plc (ADR) (NYSE:HSBC) has already made large efforts to clean up its private banking situation. And along with the disappointing loss, HSBC has announced it will buy back $1 billion of shares.

The chairman Douglas Flint recently gave further reason for optimism as he said in a statement, “We enter 2017 with the restructuring of the group essentially competed, and with a strong capital position and a conservative balance sheet.” Weak growth and a few large negative news meant the bank missed analysts’ expectations and raised doubts over whether or not its current financial strategy is working. Flint also added, “2016 will be long remembered for its significant and largely unexpected economic and political events. These foreshadowed changes to the established geopolitical and economic relationships that have defined interactions within developed economies and between them and the rest of the world. The uncertainties created by such changes temporarily influenced investment activity and contributed to volatile financial market conditions. Against this background, HSBC’s performance in 2016 was broadly satisfactory.”

Despite HSBC’s shares selling off this week, it still remains one of the best-performing European bank stocks since Britain voted in June of last year to leave the European Union. HSBC Holdings plc (ADR) (NYSE:HSBC) climbed about 53% against a 28% increase in the STOXX Europe 600 banks index. This is because HSBC benefited from the strengthening of the U.S. dollar and stronger capital levels. It’s never easy to predict what markets will do in the future. That’s why it’s best to maintain a well-diversified, balanced portfolio to weather the ups and downs over the long run. The financial sector is the backbone of the economy no matter where you live. As HSBC is a global recognized brand is among the largest in the world, it makes for an adequate proxy for the banking industry. Owning more bank stocks would be preferable, but HSBC would not be a bad place to start.

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This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.

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