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HSBC - 2bn pound buyback, but cost outstrips income growth

Nicholas Hyett | 4 May 2018 | A A A
HSBC - 2bn pound buyback, but cost outstrips income growth

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HSBC Holdings plc Ordinary USD0.50

Sell: 427.20 | Buy: 427.35 | Change 7.70 (1.84%)
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HSBC saw underlying pre-tax profits fall 3% in the first quarter, with increased operating expenses more than offsetting 3% revenue growth.

The bank announced a $2bn share buyback programme alongside the results.

The shares fell 1.9% in early trading.

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Our View

HSBC's always had an Asian flavour, it's named after two Chinese mega cities after all. But after years retreating from smaller international operations, the bank is now betting big on the high-growth emerging economies of the Far East.

Capturing that growth isn't cheap, and the cost of expansion is coming in slightly higher than had been expected.

The bank is spending heavily on its Chinese investment banking business and expanding its retail banking footprint in the UK and China. Increased investment in digital capabilities is also demanding significant quantities of cash, although should bring long term cost savings.

Fortunately, HSBC is delivering income growth as well.

Both total loans and interest margins improved this quarter, and this sort of income should prove sustainable in the long term. Low levels of loan impairment bodes well for the quality of the new loans being made. The bank's trading and investment banking divisions are also delivering positive performances, albeit more modest.

Going forwards, HSBC's fortunes will be increasingly tied to Asia, which accounted for almost 80% of profit, and China in particular.

The launch of HSBC Qianhai Securities, the first foreign owned business of its kind in mainland China, is a major step forward. Management are also looking to capitalise on the flagship Belt and Road initiative.

However, emerging economies are volatile, and if China sneezes, HSBC will come down with a bad case of the flu.

Our other concern is that HSBC's sheer size and complexity makes it difficult for management and investors to really grip what's going on across the business. 229,000 employees creates lots of opportunities for small parts of the business to operate in ways that damage the wider group.

Nonetheless, we think the bank's long term outlook is positive. As rapidly developing economies with growing populations, there are fundamental attractions to Asian markets, and while investment may hold back profitability in the short term, it's necessary to support growth.

With new CEO John Flint in place, 2018 could be the year HSBC proves its move East can really pay dividends.

The shares currently offer a prospective yield of 5.3%.

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First Quarter Results

Underlying revenues rose 3% to $13.9bn in the quarter, driven by Retail Banking & Wealth Management (RBWM), and Commercial Banking (CB).

The improvement reflects an improved net interest margin (the difference between what the bank charges on loans and pays to borrow), which hit 1.67%, up 0.04 percentage points from the year end, and a 2% increase in loans to customers which reached $981bn.

Adjusted operating expenses were 8% higher than in the same period last year at $8.2. That followed investment in RBWM and Global Banking & Markets (GBM), particularly in digital. Regulatory expenses climbed 6% to $0.7bn.

With cost increases outpacing income growth, underlying profits down 3% to $6bn. Among HSBC's main division, CB contributed 35%, RBWM 32% and GBM 28%. Asia accounted for 79% of profits.

HSBC's CET1 ratio (a standard measure of banking capitalisation) remained unchanged from the year end, at 14.5%.

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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 for more information.