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HSBC - Income growing, with profits following suit

Nicholas Hyett | 3 May 2019 | A A A
HSBC - Income growing, with profits following suit

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HSBC Holdings plc Ordinary USD0.50

Sell: 549.40 | Buy: 549.50 | Change 2.50 (0.46%)
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HSBC saw underlying revenue rise 9.2% to $14.4bn in the first quarter of the year, driven by strong results in the Retail and Commercial banks, particularly in Asia. Adjusted operating expenses rose 3.2%, with adjusted profit before tax up 9.5% to $6.4bn.

The first interim dividend remains unchanged at $0.10 per share.

The share rose 2.1% in early trading.

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Our view

HSBC's named after two Chinese mega cities, so it's perhaps no surprise that Asia accounts for around 80% of profits. Hopes for future growth are pinned on the Far East too.

Capturing that potential isn't cheap though, and operating expenses have been creeping up as a result. Increased investment in digital capabilities is also demanding significant quantities of cash, although should bring long term cost savings.

Fortunately, HSBC is seeing income growth as well.

Both total loans and interest margins have been improving, and this revenue should prove sustainable in the long term. There's been a spike in bad loans in the UK, and the trading business within the investment bank has had a mixed couple of quarters - but neither are flashing red.

The Chinese market has hit a few bumps in recent times, but HSBC has said it expects the world's second largest economy to "maintain strong growth". That's crucial. Hong Kong was a major contributor to the 24% increase in credit cards issued in 2018, and the bank's invested heavily in HSBC Qianhai Securities, the first foreign owned business of its kind in mainland China.

However, emerging economies are volatile and HSBC's significant position in trade finance means it's particularly vulnerable to the trade dispute that's brewing between China and the US. 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. 238,000 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.

The shares currently offer a prospective yield of 6%.

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First Quarter Results

HSBC's Retail Banking & Wealth Management (RBWM) business saw revenue rise 10% to $6bn. Retail performed particularly well despite a fall in mortgage revenue, with credit cards delivering strong results. The Wealth business benefitted from an improved performance in life insurance. Increased staff costs in Asia saw operating costs in the division rise 5%, but underlying profits before tax still rose 19% to $2.2bn.

Commercial Bank (CMB) revenue rose 11% to $3.9bn, with growth across all product lines and markets. Increased investment saw operating costs rise 5%, although an increase in bad loans (particularly in the UK) meant underlying profits actually fell 1% to $2bn.

The investment bank, Global Banking & Markets (GBM), saw revenue rise 3% to $4.1bn. Reduced client activity in relatively stable markets hit trading performance, although transaction banking product enjoyed a better performance. Underlying profits were broadly flat year-on-year at $1.6bn.

Global Private Banking (GPB) saw revenues fall 4% to $450m, reflecting changes to the US business and lower revenues in Switzerland. Underlying profits fell 12% to $98m. Meanwhile activity in the Corporate Centre resulted in a profit of $0.4bn, more than double that achieved in 2018.

The bank posted a return on tangible equity of 10.6%, up from 8.4% a year ago.

The bank finished the period with a CET1 ratio (a key measure of banking capitalisation) of 13.4%, up 0.3% from last quarter. The bank will announce plans for a buyback later this year to offset the scrip dividend.

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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.

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