HSBC year marked as "could do better" If the challenge of boosting HSBC's profitability can be likened to an exam, the chief executive is struggling to pass - at least according to the scorecard used to determine his pay awards. Stuart Gulliver achieved 52 per cent against the criteria used to judge his annual bonus, earning £1.95m. He also secured a £3m long-term incentive after scoring 40 per cent in a similar assessment. There were two areas of clear success. Mr Gulliver scored top marks for rebuilding the bank's capital position with the group's core tier one capital ratio - a key measure of financial strength - increasing from 10.1 per cent to 12.3 per cent during 2012, ahead of most rivals. Under tougher incoming Basel III rules Mr Gulliver said that the bank would have had a core tier one ratio of 9 per cent at the end of last year, rising to 10.3 per cent in 2013. He also made good on a promise to improve the dividend payout as the bank disclosed full-year results on Monday. In addition Mr Gulliver's payout reflected partial success in two further categories across several financial and non-financial measures. However in three areas he got zero, underscoring the work the bank still has to do - particularly on boosting revenue and cutting costs. Investors appeared to agree that Mr Gulliver's bid to improve profitability was still a work in progress. "HSBC's results are a little disappointing, but not altogether surprising," one top 10 investor said. Profits down a bit, not quite hitting targets on return of equity. Mr Gulliver will not have been surprised to get nothing when judged against a general risk and compliance category after the bank was fined almost $2bn by US authorities over Mexican money laundering and various sanctions breaches last year. More fundamental is the bank's worsening cost-efficiency ratio, which at 62.8 per cent fell short of a target range of 48 to 52 per cent. This was burdened by a raft of charges related to mis-selling and the regulatory settlement. The bank also set aside an extra $2.3bn to cover the cost of compensation for the mis-selling of payment protection insurance and interest-rate hedging swaps to UK consumers and small and medium-sized businesses. Douglas Flint, chairman of HSBC, said the $1.7bn set aside for PPI redress last year, bringing the bank's total provision to $2.4bn so far of which $1.2bn has already been paid out, would set the group up for some time to come. "We've got about 15 months of coverage sitting within that reserve," he said, adding that the $598m provision to provide compensation to SMEs who were mis-sold interest rate products, sparked by a Financial Services Authority review, also reflected "a conservative stance." However, when examining the cost-income performance, investors will be more concerned about lacklustre revenues. The bank was always going to take a hit as it exited businesses deemed as lacking in scale but Mr Gulliver said on Monday that its broader cost-income plans had been thrown off course by stagnant economic growth in Europe and the US and persistently low interest rates. HSBC's return on equity was 8.4 per cent, down from 10.9 per cent the year before and short of the 12-15 per cent target range - again earning Mr Gulliver a zero on his scorecard. The bank also blamed an adverse swing in the value of its own debt to the tune of $5.2bn for weighing on the measure. Mr Gulliver said that if the group's operations in Europe and US were stripped out, the bank would have met the 12-15 per cent target. He admitted that the dimensions of the eurozone crisis in 2011 had taken the bank by surprise. HSBC said it still had some way to go before its turnround was complete, but insisted it had made significant progress since announcing measures in May 2011 centred on cutting costs and exiting less profitable markets. There's an element of just grinding away with this, said Mr Flint. There's a lot still to do. The bank's calculation of underlying profit, a measure which excludes the effects of disposals, currency movements and changes in the value of its debt but includes regulatory fines and compensation to retail customers, also supported Mr Gulliver's payout. On this basis pre-tax profit rose 18 per cent to $16.4bn. Mr Gulliver also gained a partial payout for "strategy execution" reflecting the bank's expansion in its heartland emerging markets such as China and Brazil. He shrugged off concerns about a Chinese economic slowdown, saying he was "reasonably confident" that there wouldn't be a hard landing in the world's second-biggest economy after noting a pickup in the third quarter of last year. The next set of tests for Mr Gulliver will be at the bank's investor day in May where the chief executive will outline his priorities for the year. Chairman defends Gulliver's bonus The chairman of HSBC defended his chief executive's £1.95m bonus for 2012 by arguing it was unfair to punish indiscriminately those charged with a turnround at the bank, even as fines of almost $2bn from US authorities over Mexican money laundering and various sanctions breaches left its image tarnished last year, writes Jennifer Thompson. "The parameters of pay and the basis for pay are set" said Douglas Flint. Many of the events we have dealt with are legacy issues going back 8, 9, 10 years. His words laid bare the challenge for banks in making large awards to individuals while a series of scandals are fresh in the minds of investors and consumers. Stuart Gulliver, CEO, will also receive a long-term incentive award worth £3m, but only on retirement. The bonus and other variable pay pool for the group as a whole fell 12.6 per cent to $3.7bn. The deferred portion of this rose from 16 to 17 per cent. The bank also exercised its right to "clawback" portions of awards to staff for past performances which no longer look favourable. Formal "clawback" rules, which give banks the power to cut or cancel the portion of an individual's bonus that has been awarded but not yet paid out, have been in place in the UK and Europe since 2010. HSBC exercised this right for a sum of £700,000 in 2012 to reflect the severity of the payment protection plan scandal as well as the cost of compensation for the mis-selling of investment bonds through a subsidiary. It also expects to apply clawback in the current financial year in relation to the US fines for money laundering at its Mexico unit. However this is unlikely to result in a large sum as, unlike the pay awards of investment banking staff, those serving in retail divisions rarely had a deferred element that could be reclaimed years later.