Santander (LSE: BNC) and HSBC (LSE: HSBA) are two of Europe’s largest banks, but both have very different outlooks. Indeed, while HSBC is retreating from markets, shrinking its exposure and cutting costs, Santander is charting a course for growth and profits are exploding.
And all you need to do is take a look at the first-half results of these two banking giants to see their diverging fortunes.
Crunching numbers
HSBC’s first-half reported profit before tax increased by 10% to $13.6bn. Adjusted group revenue grew by 4%, and annualized return on shareholder equity — a key measure of bank profitability — increased to 10.6%, from 4.0% as reported at the end of last year.
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These figures impressed the market. HSBC beat, or met expectations on all key metrics.
However, Santander’s figures eclipsed HSBC’s slow-and-steady growth rate. During the first half of 2015 Santander’s pre-tax profit jumped 31% to €6bn, thanks to a 16% rise in interest income and lower impairment charges. Provisions for defaulted loans declined 5% to €2.5bn in the second quarter. Santander’s return on equity during the first half of the year only averaged 7.5%, although the group’s return on tangible equity hit 11.5%, up nearly 11% year on year.
The numbers show that HSBC is struggling while Santander surges ahead, and there are other factors that support this conclusion.
Gearing up for growth
Santander’s management has laid out a set of key performance targets for the bank to hit by 2017. These include loan growth ahead of a 17-strong global peer group, a return on tangible equity (ROTE) of 12% to 14%, a core Tier 1 capital ratio (financial cushion) of 10% to 11%, a non-performing loan ratio under 5% and a cost-income ratio below 45%.
HSBC has its own medium-term growth targets, but they are more subdued. Management has reduced the group’s return on equity target to a rather vague, “more than 10 percent” by 2017. Additionally, the group is looking to shave $4.5bn to $5bn off its annual cost base by 2017. The bank’s operations within Brazil and Turkey are being sold off as part of this restructuring.
Trust issues
Unfortunately, it’s debatable whether or not HSBC can hit its own medium-term targets. The bank has disappointed over the past five years as restructuring efforts have failed to yield the desired results. What’s more, the bank is now undoing much of the international growth achieved during the past decade.
As HSBC embarks on yet another round of business closures and job cuts, it’s becoming clear that the bank is a shell of its former self. And as the group retreats to its core markets, notably China and Hong Kong, HSBC is set to shrink in size dramatically.
Santander for growth
So, if you’re looking for growth, HSBC is not the answer. On the other hand, City analysts believe that Santander’s net income can hit €9.5bn by 2017, up 40% from the €6.8bn reported for full-year 2014. On a per share basis, analysts have penciled in earnings of 56p per share for 2017.
