HSBC's underlying revenue fell 1% to $12.2bn in the third quarter, reflecting negative market impacts in life insurance and lower trading revenues in debt markets following a particularly strong result last year. The global low interest-rate environment also continues to weigh.
Provisions for bad loans swung from an $823m charge to $659m release, underpinning a 36% improvement in pre-tax profit of $1.6bn.
CEO Noel Quinn said "we believe that the lows of recent quarters are behind us", and the group announced a new $2bn share buyback programme.
The shares were unmoved following the announcement.
Economic conditions have improved to such an extent that large chunks of provisions - money put aside in case people can't repay their debt- have been unwound. That acts as a huge boost to profits.
However, despite the upbeat headline numbers the industry's main challenge, stubbornly low interest rates, remains unchanged. Funding costs, which include the interest rates offered on customer deposits, were already at rock bottom in 2019. That means that while interest rate cuts by central banks have been passed on to borrowers, HSBC is struggling to shave anything else off what it pays depositors and other lenders.
Strong growth in UK mortgage lending is offsetting the interest rate headwind to some extent. But the long-term headwind from low interest rates is yet to subside, 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. The bank's agreed to sell its French retail operation, albeit at a $2.3bn loss, and agreed the sale of its US mass market business. The capital freed up by the reshuffle is set to be ploughed into historically stronger performing regions in Asia.
The other arm of the strategy calls for yet more cost saving. Investment in technology and automation has the potential to boost the profitability of any future revenue growth, although performance-related pay could disrupt progress this year.
There's nothing wrong with that as a plan, but the move is taking longer than some had hoped. We also note that for the time being, the crucial Asian businesses are lagging their counterparts, meaning recovery is currently being funded by the areas of the business HSBC is trying to shrink.
HSBC's diverse business model, including a large investment banking arm, provides some relief in tougher times though. 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.
HSBC is also the latest bank to hint at increased interest rates coming down the pipes.
After a year of regulator-imposed restraint, dividends are back on the table and a capital position well above target should mean they are ultimately sustainable though of course nothing is guaranteed. While we remain conscious the strategic pivot is taking longer than we'd like, an Asian focus could prove an advantage over more domestically exposed rivals. However, HSBC's size and sprawling global footprint means its performance will always track wider global economic growth pretty closely. It's unlikely to crash in a time of recovery, but unlikely to shoot the lights out either.
HSBC key facts
- Price/Book ratio: 0.56
- 10 year average Price/Book ratio: 0.90
- Prospective dividend yield (next 12 months): 4.6%
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.
Third quarter results
Net interest income rose 2.5% to $6.6bn, as net interest margins dipped 0.01 percentage points to 1.19%. That reflects an increase in less lucrative short-term loans to banks, and lower balances of higher yielding lending. Overall loans and advances to customers were $1trn, down $6bn compared to last quarter, ignoring the effect of exchange rates.
Net fee income of $3.3bn rose from $3.0bn a year ago, driven by improvements in commercial banking and a recovery in global trade volumes.
Operating expenses were broadly flat at $8.0bn, as cost savings offset increased technology investment. The bank's cost:income ratio which compares operating costs to revenue, was 62.2%, compared to 61.5%.
HSBC's CET1 ratio, which is an important measure of a bank's capitalisation, was 15.9% at the end of September compared to 15.6% at the start of the quarter. The group plans to bring this in line with the target range of 14% - 14.5% by the end of 2022. That is expected to reflect increasing returns to shareholders, increased lending and some regulatory changes.
The bank achieved a return on tangible equity of 8.7% in the quarter, up from 2.9% in 2020.
Looking ahead, HSBC expects net interest income to "begin to increase in the coming quarters from lending growth and earlier than anticipated policy rate rises." The group aims to achieve a return on tangible equity of 10% or more over the medium term.
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