The numbers are messy given recent provision and acquisition announcements, but underneath the bonnet, there are many signs of comfort leading to the conclusion that (LON:) is comfortably able to forge ahead with its growth ambitions.
The headline pre-tax profit of $7.3 billion was 14% lower than the previous year, although excluding notable items, the group ground out a 3% increase. The most recent $1.1 billion provision for a lawsuit relating to Bernie Madoff did most of the damage this quarter, while so far this year, a previous $2.1 billion charge for its losses related to its Chinese Bank of Communications stake was also a headwind.
For this quarter, a further impairment charge of $1 billion includes some further pressure from its exposure to the Hong Kong commercial real estate sector, while there has also been a “small” uptick for some of its UK business.
The news is hot on the heels of the announcement that HSBC would be buying the remainder of Hang Seng Bank, which it does not already own for an estimated $13.6 billion, or £10.2 billion. However, in order to finance the acquisition, HSBC also announced that its share buyback programme would be suspended for at least three quarters. This led to a dip in the share price on the day alongside some questions on whether this was the best use of excess capital , despite payments of the dividend, which currently yields 4.9%, being unaffected.
Taken together, these developments muddy the waters of some key metrics. Operating expenses rose by 24% to $10.1 billion, driven not only by the provisions but also by factors such as restructuring costs. The Return on Tangible Equity (ROTE) fell from 15.5% to 12.3%, although excluding the notable items, the number was a healthy 16.4%, while the cost/income ratio also suffered, rising to 56.6% from 47.9% in the corresponding period.
For all the noise, there is also evidence of growing success for its strategic plan, which is significant but simple. Whereas HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering.
The group has been investing heavily in this move, giving HSBC higher but more diversified income streams. Apart from the longer-term potential for the key Chinese market, the group previously identified areas such as India and Vietnam as being some of the fastest-growing economies at present, while building economic connections between Asia and the Middle East, notwithstanding any geopolitical conflicts, are also emerging opportunities for HSBC with its sprawling footprint.
Indeed, the Wealth business reported a 30% increase in income for the quarter to $2.68 billion, contributing to group revenues of $17.8 billion, a 5% rise on the previous year. Net Interest Income (NII) rose by 15% to $8.8 billion, helped along by a structural hedge tailwind,
Net Interest Margin improved from 1.46% to 1.57% and the capital cushion, or CET1 ratio, remained stable at 14.5%. Compared to the previous quarter, there were also notable rises in lending balances, which grew by $1.2 billion and in customer accounts, which added $18.6 billion.
There was also some positive news in a revised outlook for the year, where the group nudged up its expected NII to $43 billion from a previous $42 billion, and where the group predicted a ROTE in the mid-teen percentages or better for both this year and next. In the midst of its reorganisation are costs for the current two years of around $1.8 billion, although they should then settle at ongoing annual savings of $1.5 billion.
Despite the immediate drain on some of its capital resources given the provisions and Hang Seng Bank acquisition, the likes of HSBC already have an established and trusted brand in the Asian region which by definition provides an advantage, and the reorganisation should open the door to further growth.
Investors have been keen to acknowledge the explosive potential, with the shares having risen by 47% over the last year, as compared to a gain of 16.5% for the wider , and indeed by 123% over the last three years as the sector has undergone something of a rerating. HSBC may not be at the top of the pack given the perception of even more explosive growth elsewhere in the sector, but the market consensus of the shares as a strong hold nonetheless reflects the stability and major financial strength which investors appreciate.