We see much to admire about HSBC (HSBA). Its massive footprint allows it to offer services to global customers that few financial institutions can match. We think HSBC's past focus on reach led it to make disastrous acquisitions and to build nonstrategic operations, and we're pleased that its reorganization, begun in 2011, is refocusing the bank on the sources of its narrow moat – its ability to provide global financial services to corporate customers and its footprint in fast-growing markets. We think the streamlined strategy is freeing up capital to fuel growth in emerging markets, while cutting fat out of its operations.
HSBC traces its roots to 1865, when it was formed to facilitate trade between China and Europe. It has since become a dominant force in global banking. It is the world's largest deposit taker, with more than $1.4 trillion in customer deposits, and serves more than 100 million retail and three million corporate customers. Much of this growth was driven by acquisitions. HSBC became a major competitor in continental Europe in 2000, when it acquired France's Credit Commercial, and in the U.S. mortgage market in 2002, when it acquired the ill-fated Household. HSBC has since suffered large losses in the U.S. and has significantly reduced its retail operations there.
HSBC is now focused on growing in emerging markets, which we think will help it to achieve 6%-plus revenue growth over the long term. Near-term growth, however, will be a challenge. Economic growth is slow in HSBC's European footprint – primarily the U.K., and regulatory charges like PPI have bitten into profits. We expect these challenges to continue and point to potential foreign exchange trading fines as a likely material item. Growth has also slowed in HSBC's Hong Kong and Rest of Asia Pacific markets, and we think near-term loan growth is likely to be subpar.
While we remain concerned about whether HSBC is too big to manage effectively, we're comforted by the bank's focus on plain-vanilla corporate and retail banking. In the long run, we're optimistic that HSBC's solid foothold in fast-growing markets in Asia and Latin America will allow HSBC to outperform stagnating European peers.
The headline 20% year-over-year drop in HSBC's pre-tax earnings to $6.8 billion for the first quarter doesn't concern us, because it was largely driven by the non-reoccurrence of one-time gains in the year-ago quarter, such as the $1.1 billion gain on the de-recognition of Industrial Bank as an associate. Still, the bank's underlying results show the impact of the difficult environment. We estimate that underlying pre-tax profit, excluding disposals, acquisitions, and other significant items, fell 4% compared with the year-ago quarter. We're likely to moderately reduce our near-term earnings estimates, though we do not expect this to affect our fair value estimate for the narrow-moat bank.
