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HSBC - One-offs mask flat performance

Nicholas Hyett | 30 October 2017 | A A A
HSBC - One-offs mask flat performance

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HSBC Holdings plc Ordinary USD0.50

Sell: 385.85 | Buy: 386.05 | Change -0.60 (-0.16%)
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Third quarter profits before tax were 1% lower than the prior year after excluding one-off items. Quarterly profits of $5.4bn take profit for the year to date to $17.4bn.

HSBC shares fell 0.7% in early trading 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 stood at 8.8% at the half year.

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 since last summer. That's generous, but the dividend has stood still since 2015. The question for investors is can it be sustained and, longer term, can it be grown?

With revenue trickling away in the aftermath of the financial crisis the bank turned to a brutal cost cutting programme. By the end of this year, HSBC expects to achieve $6bn of savings. Impressive, but the group clearly can't sustain that run-rate indefinitely.

If HSBC is to generate long term value for investors it needs income growth. Much depends on its ability to deliver in Asia. The geography as a whole accounted for 74% of profits in the third quarter , and thankfully that's now growing quickly.

In particular, the bank 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. As rapidly developing economies with growing populations, there are fundamental attractions to Asian markets.

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.

Third Quarter Results

Total income of $13bn rose 36% compared to a year earlier. This was largely driven by a significant improvement in 'other income' where the group had previously posted a $3bn loss following the sales of its Brazilian business and negative movements in the value of its own debt. Without these one-offs, total revenue rose 2.5%.

The bank has grown loans and advances to customers by 10% since the start of the year, now at $945bn. However, this positive progress has been offset by a 0.1 percentage point fall in net interest margin year to date, to 1.63%. This is the difference between what the bank pays to borrow money and what it charges on loans. This has resulted in a 9% fall in net interest income compared to the same point last year.

Within HSBC's three main divisions, Retail Banking and Wealth Management performed well, with profits before tax surging 11% to 1.7bn. Commercial Banking also turned in a positive performance as profits rose to $1.6bn. The investment banking business, Global Banking & Markets, saw profits fall 3% to $1.5bn, although this represents a good performance in a tough market.

Third quarter adjusted operating expenses rose 7% to $7.8bn, reflecting an increase in bonuses and ongoing investment, and outpacing income growth. Impairments in the quarter of $448m were lower than the previous year.

The bank's 14.6% Common Equity Tier 1 ratio (CET1 - a common measure of banking capitalisation) has fallen slightly from Q2, as a result of increased Risk Weighted Assets.

The bank announced a third quarter dividend of $0.10 per share and has completed 71% of the $2bn buy-back announced in July.

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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 disclosure for more information.

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.