HSBC Holdings plc’s (HSBC - Analyst Report) earnings for third-quarter 2014 came in at 17 cents per share, 6% above the prior-year quarter figure. Net profit was $3.6 billion, up 4% year-over-year.

Results in the reported quarter included $378 million of provision regarding FCA investigation into alleged foreign exchange manipulation charges, $701 million related to UK customer redress programs and $550 million pertaining to the settlement with the U.S Federal Housing Finance Authority.

Lower loan impairment charges and stable revenues acted as tailwinds. Further, capital and profitability ratios remained strong. However, a continued rise in operating expenses was the major dampener.

Performance in Detail

Underlying profit before tax was $4.4 billion, declining 12% from the prior-year quarter. The fall was mainly due to lower revenues and a rise in operating expenses, partly offset by lower loan impairment charges.

Total revenue (on an underlying basis) was $15.6 billion, including the effect of several significant items, and almost stable compared with the year-ago quarter figure. Excluding the impact of these, revenues grew marginally driven by growth in Global Banking, and Markets and Commercial Banking segments.

Underlying total operating expenses rose 15% year over year to $11.1 billion, including the impact of above-mentioned non-recurring items. Notably, excluding these significant items, total expenses climbed 6% due to increased risk, compliance and related costs.

Underlying cost efficiency ratio increased to 71.2% from 61.7% in the prior-year quarter. A rise in efficiency ratio indicates fall in profitability.

Performance by Business Line (on underlying basis)

Retail Banking and Wealth Management: The segment reported $1.3 billion in pre-tax profit, down 18% from the prior-year quarter. The decline was due to a rise in operating expenses, partially offset by higher revenues and a fall in loan impairment charges.

Commercial Banking: The segment reported pre-tax profit of $2.3 billion, up 23% from the comparable last-year quarter. The rise was mainly driven by higher revenues and a decline in loan impairment charges, partly offset by higher operating expenses.

Global Banking and Markets: Pre-tax profit for the segment was $941 million, decreasing 46% year over year. The segment’s results suffered owing to a rise in loan impairment charges and operating expenses, partly offset by higher revenues.

Global Private Banking: Pre-tax income for the segment was $190 million, an improvement from a pre-tax loss of $23 million incurred in the year-ago quarter. The growth was attributable to lower expenses, partially offset by a fall in top line.

Other: The segment recorded a pre-tax loss of $320 million against $180 million in the year-ago quarter.

Profitability and Capital Ratios

HSBC’s profitability and capital ratios remained strong. Annualized return on equity was 7.2%, in line with that of Sep 30, 2013 level. Pre-tax return on risk-weighted assets (annualized) inched down to 1.5% from 1.6% in the prior-year period.

The company’s common equity Tier 1 ratio as of Sep 30, 2014 was 11.2%, at par with Sep 30, 2013 level.

Our Viewpoint

By disposing unprofitable/non-core operations, HSBC is striving to boost its profitability amid the challenging market environment. The company is poised to benefit from its extensive global network, strong capital position, cost-containment measures, business re-engineering and solid asset growth.

However, high inflation in key Asian markets, sluggish loan growth, disappointing core operating performance and increased wage inflation will likely limit the company’s growth in the near term.

HSBC currently carries a Zacks Rank #2 (Buy).

Performance of Other Foreign Banks

Barclays PLC’s (BCS - Analyst Report) adjusted net income attributable to shareholders came in at £2.6 billion ($4.0 billion) for the first nine months of 2014, almost stable compared with the prior-year period level. This was mainly due to weaker investment banking income as the company continued to face lower client activities.

UBS AG (UBS - Analyst Report) reported third-quarter 2014 net income attributable to shareholders of CHF 762 million ($834.2 million), which compared favorably with the prior-year quarter earnings of CHF 577 million ($619.1 million). The results were driven by elevated net interest income, and increased net fee and commission income.

Deutsche Bank AG (DB - Analyst Report) reported net loss of €92 million ($122 million) in the third quarter of 2014, compared with an income of €51 million ($67.5 million) in the prior-year quarter. Lower provision for credit losses and higher revenues were more than offset by an increase in non-interest expenses.

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