HSBC has recently published its financial results for 2004. The good results reported therein seem to have been anticipated by the market since the share price, which had spent some weeks struggling with Lm8, is now comfortably over Lm9.
Anticipation is easiest with hindsight but this time, even with foresight, one could have expected good results because Bank of Valletta had reported advancing figures last October (for its year ended September 2004) and there is the three-month overlap which is very helpful to people like us who are always gazing on our crystal ball.
The engine propelling the results is, once again, net interest income and this not from loan interest revenue, which actually declined by some Lm2.4 million, but on the expense side, the interest paid on deposits, which was down by Lm7.2 million. As a result, net interest income increased by Lm4.8 million, or 14 per cent, and since this figure was by far the biggest growth item, and since interest rates on deposits can only go down to zero, and are now not far from that figure, one is forced to conclude that the bank will seek other avenues to increase profits.
There are other avenues available but the impact on the bottom line is unlikely to be huge, in the short and medium-term unless interest rates increase substantially and loans would start yielding more. I say this because I seem to be meeting more than the usual number of investors who sidle up to me and tell me how their peering into their crystal ball seems to be suggesting eternal growth of some 25 per cent plus for the banks, which would be, to say the least, very difficult to achieve, even considering their huge market power.
Nearly all HSBC Bank Malta's other operating income items showed increases except (surprisingly) fees and commissions receivable and the (nearly immaterial) dividend income. All in all, these other operating income items increased by Lm1.3 million, or seven per cent; still a good result considering that we have close to zero economic growth, but in percentage terms only half that obtained from lower interest rates. Overall, operating income increased by Lm6 million, or by 11 per cent, to Lm59.4 million.
Two very positive things delivered by HSBC during 2004 were an increase in loans and advances to customers of Lm57 million (not huge but much better than 2003's Lm32 million) and marvellous cost control which practically left costs unchanged, up by just Lm116,000. This last must have been a gargantuan task. With costs fixed and revenue expanding, the cost to income ratio was pushed down from 57 per cent in 2003 to 52 per cent in 2004.
The fact that costs were maintained at the same level as in 2003 meant that all the gains in operating income rushed down to operating profit which also went up by Lm6 million, but on a smaller base, making for a 26 per cent increase, to Lm28.7 million. Net impairment and liability reversals added nearly another Lm1 million over 2003, leading to a profit before tax of Lm33 million (2003: Lm26.2 million) and a profit after tax of Lm22.1 million (2003: Lm16.8 million).
Deposits by customers increased by just Lm21.6 million but this follows on 2003's fall in deposits of Lm35.8 million. Low deposit interest rates make bank deposits relatively unattractive and this is pushing money towards bonds, notably government bonds, which are being offered to the public only with a very long maturity profile.
There is a dire need for government to issue for public (and not solely institutional) subscription short-term and medium-term bonds in order for the public to be able to diversify its bond portfolio's maturity risk profile. This recommendation goes unheeded, year in, year out.
The recent cum-dividend price of Lm9.30 is capitalising the 60c7 earnings per share at 15.3 times and is two and a half times net asset value which, given HSBC Bank Malta's market presence and relatively small float, is not onerous. The dividend policy is liberal but appropriate and HSBC distributed total gross dividends of 82c1, which includes a special "Fifth Anniversary" dividend of 35c4.
The directors are proposing to split the shares in two; the high share price figure gives rise to attrition, keeping the market value back.
Interestingly, Shaun Wallis, chief executive officer, commented that "the financial contribution to the country is also beneficial, with a tax charge to the Malta government and total dividends to minority shareholders in 2004 exceeding the operating profit of the bank in 1998 by more than Lm5 million".
It is interesting because it shows how wise we were, back five years ago, when we insisted that existing shareholders in Mid-Med should have the right to stay on in HSBC which ought to retain its listing on the local stock exchange, and how welcome HSBC was to concur to our proposal.
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. The company is involved in acting as sponsoring and corporate stockbroker for various listed companies.
This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such.
The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.
pva@onvol.net