Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

HSBC - interest income drives higher returns

HSBC reported an 18% rise in full year underlying revenue, to $55.3bn.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

HSBC reported an 18% rise in full year underlying revenue, to $55.3bn. Growth was driven by higher net interest income, as net interest margin rose from 1.20% to 1.48%, which offset a drop in fee income.

Underlying profit before tax rose 17%, to $24.0bn. That doesn't include the $2.4bn non-cash charge taken due to the the planned sale of retail banking operations in France. Credit impairment charges of $3.6bn were recognised over the year, in preparation for economic uncertainty and ongoing challenges in China's real estate sector.

HSBC's CET1 ratio (a key measure of capitalisation) ended the year at 14.2%, having risen over the fourth quarter and now back within target range.

The Board has approved a second interim dividend of $0.23 per share, taking the total for 2022 to $0.32. Subject to the completion of the sale of its Canadian business, a special dividend of $0.21 will be considered.

The shares fell 1.3% in early trading.

View the latest HSBC share price and how to deal

Our view

A strong fourth quarter topped off a decent year for HSBC. Interest income isn't the only avenue for profit, but nonetheless higher rates have given profits a kick in the right direction. That trend's expected to continue into 2023, although perhaps not quite to the extent markets were hoping for.

What sets HSBC apart from many of the large UK players is its exposure to Asia, which makes up around 78% of pre-tax profit. Lacklustre growth for several years meant there was significant pressure to refocus, and that's exactly what's happened.

This includes selling its French retail operation, the US mass market business, and now its Canadian division. The capital freed up by the reshuffle is being ploughed into historically stronger-performing regions in Asia. Hong Kong and China are of note, both key regions and an improved economic outlook is supportive of future performance - so long as it continues.

Aside from traditional lending there's also a large investment banking arm. This division makes a substantial chunk of revenue through trading and banking fees when companies raise money - so is less influenced by change in global interest rates. Fees have been under pressure though, as market activity's down in the face of economic concerns.

Now for the real challenges. HSBC has been on a cost-saving mission for years. Guidance on cost growth was nudged higher in recent results, from 2% up to 3%. That highlights exactly how difficult it is to control costs in the current environment. Nonetheless, it's a focus we're happy to see.

Then we have the real impact of weaker economic conditions. Last year, $3.6bn was set aside to prepare for a higher level of loan defaults. If conditions aren't as bad as feared, which we think could end up being the case, there's a chance some of this ends up being returned. That could prove a boost to profit down the line and is exactly what happened to pandemic provisions, some of which were returned in the recent year. Of course, there's no guarantee.

It was pleasing to see the capital position return to within targets, following an unexpected tax tailwind in the fourth quarter. That means excess distributions are back on the table, buybacks are expected to enter the conversation early in 2023 and a special dividend when the Canadian sale completes has all but been confirmed. Again though, this is subject to change.

Ultimately, HSBC's Asian focus offers a genuine differentiator from many of its peers. We like the direction of travel and exposure to a reopening in China. But there's still work to be done and a good deal of optimism has already been priced in this year. We like the name as a longer-term play but caution the near term could be bumpy.

HSBC key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 21st February 2023