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HSBC - One-offs hit profits but boost capital

Equity research team | 7 November 2016 | A A A
HSBC - One-offs hit profits but boost capital

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HSBC Holdings plc Ordinary USD0.50

Sell: 406.65 | Buy: 406.85 | Change -6.25 (-1.51%)
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One-offs hit profits but boost capital

Reported third quarter profit before tax at HSBC fell 86% from a year earlier, as currency movements and exceptional items, including a $1.7bn loss on the sale of the bank's Brazilian business, hit performance. Adjusted profits rose 7% as revenue grew in the Global Banking & Markets and Retail Banking & Wealth Management divisions and costs across the bank fell 4%.

The shares rose 4.2% in early trading.

Our View

It is still very much work in progress at HSBC. The bank is engaged in a major repositioning, one which will see it become much more focused on its Asian origins and far less exposed to volatile investment banking activities.

As China takes a growing role on the global stage, HSBC wants to be the financier of choice for anyone seeking to do business there. Trade financing has always been big business for HSBC, reflecting its Hong Kong roots, and the bank is growing its market share.

That trade focus means that, although China is key, HSBC's future is also reliant on the health of the broader global economy. The diversity of its loan book gives the bank resilience; apart from UK mortgages and commercial lending, no single asset class makes up more than 5% of the book.

Reshaping the group is no small task, and there is the issue of ring-fencing the UK retail bank too. But HSBC seems to be making steady progress, with costs remaining under control, down $2.8bn since 2015, against a target of $5bn by the end of 2017.

HSBC and China's fortunes will be increasingly tied together. Recent market concerns over the health of the Chinese economy have been unhelpful for the stock, pushing the dividend yield up to almost 8%. However, that has now dropped back to a more reasonable 6.3%, and today's improved capital position will further reassure investors about the dividend's long run prospects.

The capital boost though is the result of a one off regulatory change rather than improved organic capital generation. Such windfalls are unlikely to be repeated, and ultimately HSBC needs to convince the market that its restructuring will raise future returns in the business. Things are looking up, but not so long ago the bank was targeting a 10% return on equity by 2017. With returns so far this year below 5% and negative in Q3, HSBC still has a point to prove.

Third Quarter Results:

The group reduced risk weighted assets (RWAs) in the quarter by $57bn, $40bn of which came from the sales the Brazilian business. The group is 80% of the way to achieving its RWA reduction target.

The bank has now delivered $2.8bn in annualised cost savings, and is on track to achieve the 2017 cost saving target as well. However, continued pressure from record low interest rates mean that the net interest margin (the difference between what it can charge borrowers and pay depositors) fell in the quarter.

The group's regulated capital reserve, Common Equity Tier 1 Capital (CET1), improved by almost two percentage points to 13.9%, mainly due to regulatory amendments to how its stake in China's Bank of Communications (BoCom) is accounted for.

CEO Stuart Gulliver said that the improved CET 1 ratio allowed the banks "to support the dividend, to invest in the business, and, over the medium term, to contemplate share buy-backs". The current share buyback, announced at the half year, is 59% complete and expected to finish in late 2016/early 2017.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.