HSBC reported first quarter revenues of $13.0bn, down 5% as the group struggled with low interest rates. However, pre-tax profits rose 79% to $5.8bn, reflecting a dramatically improved economic outlook and a significant improvement in provisions for bad loans as a result.
The group isn't paying quarterly dividends this year , but is still considering a half year dividend.
The shares were unmoved in early trading
The improving economic environment is working wonders for HSBC's bottom line. Bad loans have not only been low, but so low the bank's been able to release some of the money it had set aside in anticipation of defaults. Look a little deeper though and the story is not so positive.
By far the bank's biggest challenge is the low interest rate environment. Funding costs, which includes the interest rates offered on customer deposits, were already at rock bottom prior to the crisis. That means that while interest rate cuts by central banks have been passed on to borrowers, HSBC is struggling to shave anything else off it's funding costs.
Strong growth in UK mortgage lending is offsetting the interest rate headwind to some extent - driving extra volumes albeit at lower prices. But the long-term headwind from low interest rates seems unlikely to subside any time soon and a $1trn+ loan book means the pain will mount as more mature fixed loans roll-off. That increases the pressure on HSBC to deliver results from its ongoing strategic pivot.
HSBC's sprawling global footprint means it's present in some markets where either its business is sub-scale or it sees long term returns as unattractive. Specifically, the bank's looking at selling its French retail operation and "reviewing other options" for its US retail business, with the capital freed up by the reshuffle set to be ploughed into stronger performing regions in Asia. The other arm of the strategy calls for yet more cost saving, with investment in technology and automation potentially boosting the profitability of any future revenue growth.
There's nothing wrong with that as a plan, but the move is taking longer than some had hoped. There has since been little real update on progress.
Fortunately, HSBC has a large investment banking arm, which is providing some short-term relief. This division makes a substantial chunk of revenue through trading and banking fees when companies raise money - so is less influenced by global interest rates. Turbulent financial markets have led to a spike in trading and hedging activity, which has been good news for revenue. In the near-term it will help the group mitigate headwinds impacting the rest of the business.
The bank is also heavily exposed to emerging Asian economies, particularly China, and there are some signs these markets are recovering reasonably well from the coronavirus shock. Certainly, the region performed better than others last year - although US/China tensions are potentially very disruptive if they continue.
While we remain conscious of the risks in more developed markets and the strategic-pivot is taking longer than we'd like, an Asian focus could prove an advantage over more domestically exposed rivals. After a year of regulator-imposed restraint, dividends are back on the table. While it looks set to be lower than some might have liked, a capital position well above target should mean the dividend is ultimately sustainable.
Investors are now at least being paid to wait and see if HSBC's pivot delivers fruit. The low interest rate environment is a long-term headwind, but if HSBC can eek out income growth then a more efficient cost base could help deliver those long-delayed profitability targets.
HSBC key facts
- Price/Book ratio: 0.54
- 10 year average Price/Book ratio: 0.92
- Prospective dividend yield (next 12 months): 3.9%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
First Quarter Results
Net interest income fell 14.4% to $6.5bn, despite advances and loans to customers remaining broadly unchanged at $1.0trn. That reflects the effect of lower global interest rates, with net interest margins (the difference between what the bank charges on loans and pays on deposits) down 0.33 percentage points to 1.21%.
Net fee income rose 10.9% to $3.5bn, reflecting increased trading and corporate advisory activity. However, income from instruments held for trading fell 28.4% to $2.4bn.
The insurance business reported a significant increase in revenues year-on-year, due to the non-recurrence of substantial hits to valuation this time last year - moving from a $3.6bn negative impact last year to a $1.2bn positive in 2020. Insurance premiums received were broadly unchanged at $2.9bn.
The bank made a net credit provision release of $435m, compared to a $3.0bn provision in Q1 2020. That reflects a better economic outlook, particularly in the UK, and the non-recurrence of a large corporate exposure in Singapore last year.
Operating costs rose 9% year-on-year to $8.5bn, as the bank faced $0.3bn of currency headwinds as well as continued restructuring costs and digital investment.
The bank's CET1 ratio remained unchanged quarter-on-quarter, at 15.9%, as a modest decline in capital was offset by lower risk weighted assets. That remains some way above the bank's 14% target, despite making provision for the possibility of a modest dividend later in the year
The full year outlook is uncertain, but HSBC expects provisions for bad loans to be below its previous guidance for the year as a whole. Lending is expected to grow by mid-single digit percentages.
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