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HSBC - Growth continues, with $2bn buyback on offer

Nicholas Hyett | 31 July 2017 | A A A
HSBC - Growth continues, with $2bn buyback on offer

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HSBC Holdings plc Ordinary USD0.50

Sell: 423.05 | Buy: 423.20 | Change -3.45 (-0.81%)
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Half year results saw underlying net income rise 3%, to $26.1bn, while underlying profits before tax rose 12.4% to $12bn.

The bank also announced a $2bn share buy-back to be completed in the second half of 2017.

The shares rose 3.5% following the announcement.

Our View

HSBC finally seems to be over the hump.

Impairments from bad loans are falling, income is on the up and the key Asian region is growing. Return on equity, which fell to a measly 0.8% in 2016, has bounced back strongly now that a whole raft of exceptionals are in the past and now stands at 8.8%.

However, HSBC's investment case is really all about shareholder returns. The bank offers a prospective dividend yield of 5.2%, and has completed or announced $5.5bn of share buybacks in the last year. That's generous, but the real question for investors is can it be sustained and, longer term, can it be grown?

As the bank has sought to restructure itself after the financial crisis revenues have trickled away. HSBC has been carrying out a brutal cost cutting programme to offset that headwind. We're seeing the benefits of that programme in the bank's positive cost to income jaws (the difference between revenue growth and cost growth).

While the cost cutting programme, and disposals of lower value assets, is set to continue, neither can last forever. Longer term, HSBC's success will depend on its ability to deliver on the fundamental attractions of Asian markets; rapidly developing economies with growing populations.

In particular HSBC wants to be the financier of choice for anyone doing business in China. Trade financing has always been big business for HSBC, reflecting its Hong Kong roots, and the bank is growing its market share. The launch of HSBC Qianhai Securities is a major step forward but also an indication that, as time goes on, HSBC and China's fortunes will be increasingly tied together.

If we have a concern about HSBC it's that its sheer size and diversity makes it difficult for management, and investors, to really grip what is going on across the business. 233,000 employees increases the chances of incidents like the Mossack Fonseca tax avoidance scandal, with small parts of the business operating in ways that damage the wider group.

Nonetheless, we think there are reasons to be positive about the group's prospects. With many of the immediate headwinds out of the way, it's now up to HSBC to prove that its move East can really pay dividends.

Half Year Results

First half profits were evenly split between HSBC's three major business units, with each of Retail Banking & Wealth Management, Commercial Banking and Global Banking & Markets generating profits of $3.4bn. This represents significant growth across all divisions.

The importance of Asia continues to grow, with the region now accounting for almost 75% of all profits. The Asian Insurance and Asset Management divisions saw new business premiums and assets under management increase 14% and 17% respectively. The group also received regulatory approval for HSBC Qianhai Securities; the first securities company in mainland China to be majority-owned by an international bank.

The bank has continued to make progress on its cost saving agenda, with annual run-rate savings of $4.7bn since announcing its new strategy in 2015, including $1bn of incremental savings in the half. HSBC remains on course to hit the $6bn mark by the end of 2017.

HSBC's common equity tier one (CET1) capital ratio, a key measure of bank capitalisation, improved from 13.6% to 14.7%. The improved capital position, despite $3.5bn of share buy-backs since mid-2016, supports the $2bn share buyback announced with results. The dividend over the period has remained flat at $0.20 per share.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.