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HSBC - CEO steps down, outlook cautious

Nicholas Hyett | 5 August 2019 | A A A
HSBC - CEO steps down, outlook cautious

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HSBC Holdings plc Ordinary USD0.50

Sell: 425.60 | Buy: 425.70 | Change 6.25 (1.49%)
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Operating income rose 5.1% to $27.4bn in the first half, driven by good growth in the Retail Banking & Wealth Management (RBWM) division and Asia. That more than offset a 3.5% increase in operating costs, with underlying profits before tax up 6.8% to $12.5bn.

The interim dividend remains unchanged at $0.31 per share, and the bank has announced a $1bn share buyback.

John Flint will be stepping down as CEO with immediate effect, with Chief Executive of Global Commercial Banking Noel Quinn to act as interim CEO until a replacements is found.

The shares were broadly flat in early trading.

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Our view

HSBC has a global presence, but as the name suggests, the Far East, and particularly China, is the group's main driver. Exposure to rapidly developing economies with growing populations, is fundamentally attractive. Unfortunately, there are several unwanted distractions at the moment.

The departure of CEO John Flint after just 18 months in the role is a surprise, especially as second quarter results were pretty strong. However, the board clearly feels a change of tack is required to deal with mounting macroeconomic and geopolitical challenges.

Leadership aside, top of the list of concerns for HSBC is probably the trade dispute between China and the US. Asia accounts for 80% of profits and HSBC's significant position in trade finance means it's particularly vulnerable. If China sneezes, HSBC will come down with a bad case of the flu. It doesn't help that within Asia, Hong Kong is a crucial market, and political turmoil in the enclave isn't good for business.

Funding Asian growth isn't cheap either, and operating expenses have been creeping up as a result. Increased investment in digital capabilities is also demanding significant quantities of cash, although on the plus side it should bring long term cost savings.

Meanwhile the supposedly safe and steady UK business is wrestling with the challenges a disorderly Brexit could bring. So far the group's weathered the storm better than many rivals, with loan growth comfortably offsetting margin compression in a competitive market. However, bad loans are creeping up - mostly in business lending at the moment and certainty not to danger levels, but something to keep an eye on nonetheless.

Underpinning both those problems is a less upbeat outlook for interest rates in the US. Banks tend to do better when rates are rising, and with the Fed more likely to cut than raise rates this year, that's likely to mean the squeeze on interest margins continues for some time.

Overall, we're inclined to be cautious. With no permanent hand on the tiller, HSBC's strategy is unclear. The bank's sheer size and complexity makes that more challenging, and 238,000 employees creates lots of opportunities for small parts of the business to operate in ways that damage the wider group.

Still, a prospective yield of 6.5%, plenty of longer-term growth potential and a healthy level of capitalisation means the bank will have attractions to those in search of a sizeable yield. They just need to be prepared to weather some potentially dramatic ups and downs.

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Half Year Results

At the divisional level RBWM reported total net income of $11.9bn, up 11.7% year-on-year, as mortgage volumes increased and the revenues from life insurance sales rose 54%. Underlying operating profits in the division rose 23.2% to $4.4bn.

Commercial Banking (CMB) net income rose 9.5% to $7.8bn, with growth across all regions and product lines. However increased costs and impairments meant underlying profits only rose 1.3% to $4bn.

HSBC's Global Banking & Markets (GB&M) unit struggled in an uncertain market with net income down 2.7% to $7.7bn on lower trading revenue. Higher operating costs following increased investment meant underlying profits fell 17.7% to $2.8bn.

Net income rose 1.9% in Global Private Banking (GPB) to $924m, as the division delivered growth in Asia, with lower operating expenses boosting underlying profits to $196m - up 4.8% year-on-year.

The Corporate Centre reported underlying profits rose 8.2% to $1bn.

The bank finished the half with a CET1 ratio, a key measure of banking capitalisation, of 14.3%, up 0.3 percentage points from December. Return on equity during the quarter reached 11.2%.

Falling interest rates in the US, increasing geopolitical tension and Brexit uncertainty have all contributed to a more cautious outlook. However, the bank continues to target a return on equity of over 11% in 2020.

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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.