THE City's love affair with the Far East has cooled in recent months
with both Standard Chartered last week and HSBC yesterday seeing their
share prices ease after less-than-enthralling results from their core
operations in Hong Kong.
The group's global pre-tax profits for the first six months rose 24%
to #1461m -- some 41% higher than Barclays which emphasises who really
is Mr Big among the British banks.
However, the improvement came from a reduction in bad-debt provisions
with operating profit down over 4% at #1576m, admittedly that hit by a
pretty difficult time in dealing where the Midland Bank subsidiary's
Midland Global Markets staggered from a #296m profit into a #6m loss.
Overall group dealing income slumped from #522m to just #73m.
Chairman Sir William Purves was anxious to emphasise yesterday that
1993 had been an exceptional year in treasury and foreign exchange
activities for all banks.
In early 1994, the group had anticipated an increase in interest rates
in February. However, it was not prepared for the reaction in European
bond markets which fell ''rather drastically''.
The bank's own book saw a swinground year-on-year from #75m profit
into a #92m loss and is now operating at a much-reduced level and will
continue until markets stabilise. And the increase in Swedish and
Italian interest rates last week is persuading HSBC to keep its head
down even further.
However, while the large dollops of profit which accrued last year
were most enjoyable at the time, the quality of earnings is pretty low
as regards sustainability -- just as well as prolonged volatility will
dissuade capital investment and corporate borrowing.
The Midland's own results were actually quite good apart from the
dealing side with overall stated pre-tax profits up 15% to #443m.
Customer advances were down over 8% to just under #39 billion with the
decline in dealing profits offset by a fall in bad-debt provisioning.
The disturbing point is that the cost income ratio jumped from 61.9% to
69.6%, the highest of any domestic British bank.
And even if an average is drawn between the two numbers as being a
more accurate reflection of the underlying cost position, Midland has
some way to go to get to the HSBC average of just under 60%.
Sir William would not rule out acquiring another UK financial
institution but dolefully admitted that he lost the best opportunity
when he failed to win the Royal Bank of Scotland in 1981. So in the
short term at least, aspirations seem to be limited to opening Midland
Bank branches in Scotland with that in Glasgow to be followed before the
year-end by a presence in Aberdeen. Maybe he should buy the Clydesdale
back from National Australia Bank!
Acquisition seems most likely in the US where Marine Midland is now
fully back on its feet and may also absorb the Concorde Leasing
subsidiary which has lost just over #250m in the last 18 months because
of the poor residual values of leased aircraft.
In Hong Kong itself, net interest income was flat while the global
downturn in dealing profits also made an impact to the extent there was
little overall change in pre-tax profits before the inclusion of asset
sale surpluses.
Again the Hongkong & Shanghai Banking Corporation saw little increase
in customer lending, echoing the experience of Standard Chartered. Both
banks have negligible bad-debt provisions for the Crown Colony which
reflects the general mortgage situation where the usual deposit is 30%
and credit scoring appears to be tougher than in Britain.
But the return on assets is almost twice that in the European
operations at 2.2%, helped by the more advanced systems and technology.
Sir William reckons it will take another four or five years before the
Midland is as efficient as its Far Eastern counterparts.
Certainly there seems little likelihood of his giving way on the
present dispute with the bank workers' union (Bifu) which is balloting
staff on strike action after an imposed 2.25% wage increase.
Investment banking raised its contribution by 36% to #101m with the
stronger performances coming from the British duo of Samuel Montagu and
James Capel with strong corporate volume including Capel's handling of
the #280m Ashanti Goldfields flotation.
In Hong Kong, there appears to be some caution as to the trend in
future banking profitability.
Additionally for HSBC, the problem is that the tax advantages brought
into the group through the Midland acquisition are now drying up and so
profits will have to work very hard indeed to make that much impact upon
earnings per share.
The interim dividend has been raised 14% to 8p with the increase in
payout as well as potential yield below that of the UK clearers.
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