Credit impairments have largely blotted HSBC’s (LON:) copybook for this quarter, while the lack of a return to the share buyback programme may also provide some disappointment, even though that return may not be far away.
As has been the case for many other global banks this reporting season, the impact of the Middle East conflict has made an appearance in the numbers. HSBC has exposure to the region, let alone the broader economic impacts, and has modelled scenarios of increasing severity and duration which could lead to higher oil prices and inflation, slowing GDP growth and rising unemployment. As such, a charge of $1.3 billion, compared to $876 million the previous year, includes $300 million related to the current conflict. This adds to the previous concern that the group’s exposure to Asia could be a temporary fly in the ointment, where a previous $2.1 billion charge for losses related to its Chinese Bank of Communications stake and $1.4 billion of legal provisions contributed to an overall $4.9 billion headwind last year, with the commercial real estate situation in Hong Kong and mainland China remaining difficult.
The headline numbers are slightly mixed, with revenues rising by 6% to $18.6 billion and ahead of the expected $18.49 billion, while pre-tax profit fell by 1.1% to $9.38 billion, shy of the $9.59 billion estimates. Net profit also fell by 2.3% to $7.39 billion, although beating the $7.02 billion which had been pencilled in by investors.
Perhaps more positively, its four units each contributed to the rising income number. The largest, Corporate and Institutional Banking, saw revenue growth of 2% to $7.79 billion, followed by its other businesses with gains of 3% to $4 billion for Hong Kong, 5% to $3.25 billion for the UK and 2% to $3.75 billion for International Wealth and Premier Banking.
The other key metrics also remain generally robust. The Return on Tangible Equity (ROTE) excluding notable items rose from 18.4% to 18.7%, Net Interest Margin increased from 1.59% to 1.6%, while Net Interest Income (NII) grew by 7.7% to $8.95 billion, driven by deposit growth and the benefit of structural hedge income. Banking NII, which excludes funding costs, rose by $700 million to $11.3 billion. Elsewhere, the provisions dragged on a cost/income ratio which rose to 46.8% from 45.9%, with the CET1 ratio, or capital cushion, falling to 14% from 14.7%, although still within the group’s 14% to 14.5% target range.
The group’s push towards the affluent sector received another boost, with the most promising contribution coming from Wealth. Fee income rose by 18% to $2.7 billion, with net new money for the quarter of $39 billion ($34 billion from Asia) comparing favourably to the $23 billion ($19 billion from Asia) of the corresponding period. 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.
Even with the stalled momentum, HSBC nudged its full-year outlook for Banking NII to $46 billion from a previous $45 billion, and stated that annualised cost savings of $1.5 billion would be achieved six months ahead of plan. Elsewhere, the outlook numbers were maintained, such as a ROTE in excess of 17% for this and indeed the next two years. Such financial firepower also enabled the dividend to be maintained, where a yield of 4.1% is of some comfort compared to the previous disappointment of a briefly suspended share buyback programme in order to fund the Hang Seng Bank acquisition.
It remains to be seen whether this quarter turns out to be a blip towards HSBC’s aspirations, as could likely be the case. The disappointed reaction to the update at the open has been exacerbated by wider market weakness given the apparent resumption of some hostilities in the Middle East. Nonetheless, it has done little to derail the overall progress of a share price which had risen by 65% over the last year, as compared to a gain of 20% for the wider , and by 97% over the last two years. These gains have lifted HSBC to become the largest member of the FTSE100, helped along by a general sector rerating. While the group may not be at the top of the pack given the perception of more balanced growth elsewhere in the sector, the market consensus of the shares as a cautious buy nonetheless reflects the stability and major financial strength which investors will especially appreciate in volatile trading times such as these.