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HSBC - outlook lifted as higher rates boost income

HSBC reported half-year revenue of $36.9bn, up 55.7% when ignoring currency impacts. Growth was driven by higher rates, which pushed net interest income

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HSBC reported half-year revenue of $36.9bn, up 55.7% when ignoring currency impacts. Growth was driven by higher rates, which pushed net interest income higher across all its global businesses.

Net interest margin (the profitability of borrowing/lending) rose 46 basis points to 1.7%.

Profit before tax more than doubled, to $21.7bn. $3.6bn reflected the reversal of a previous impairment charge from the planned sale of operations in France, and a provisional gain on the acquisition of Silicon Valley Bank UK. There was a £1.3bn impairment charge taken in preparation for higher levels of loan defaults.

The group's CET1 ratio (a measure of financial strength) rose to 14.7%. The board has approved an interim dividend of $0.10 and a new buyback of up to $2bn.

Full-year guidance for net interest income has been raised, now expected to be above $35bn.

The shares rose 2.5% in early trading.

View the latest HSBC share price and how to deal

Our view

There was a lot to unpick half-year results. If we look past some of what we'd call 'accounting profits', the underlying performance was strong.

Interest income isn't the only piece of the pie, but it's certainly a large one, meaning higher rates have given income a significant boost. Arguably more important is the quarter-on-quarter performance, given fears that the rate benefits may have peaked. Net interest margin, which measures the profitability of lending/borrowing, was up from the first quarter and better than analysts expected.

HSBC's exposure to Asia, which accounts for a little less than half of all customer accounts, sets it apart from many of its large UK peers. Lacklustre growth for several years meant significant pressure from a section of the investor base who want to see the business spin out its Asian operations. For now, the board's adamant that's not the right way to go, and the response is a renewed focus on higher growth areas.

There's progress on the portfolio reshuffle, with the sale of its French business back on the cards and its Canadian division looking like it'll be shipped off at the start of 2024. The capital freed up is being ploughed into what have been historically stronger-performing regions in Asia. Hong Kong and China are of note, both are key regions, and an improved economic outlook supports future performance - so long as it continues.

Aside from traditional lending, there's also a large global banking arm. Income is diverse, from trading in credit and currency markets to trading finance and payment solutions. Interest rates still impact some income streams, but not to the extent of more traditional banking operations. With interest rate tailwinds easing, we support the diversification this brings.

Now for the challenges. Costs in a higher inflation environment are a bugbear for almost everyone. HSBC has been on a cost-saving mission for years, and it's a good job too. We can now expect underlying costs to rise around 3% this year, that would be a good result. It's a tough ask, but doable.

We had some positive news over the half, with HSBC suggesting the economic outlook was improving. Charges taken in anticipation of debt defaults were lower than expected. But it's far too early to call an end to the potential trouble.

The Asian focus is a differentiator from many of its peers, and we continue to see the potential for further growth from what's so far been a muted reopening in China. There's plenty of scope for shareholder returns with the balance sheet in a strong place and we like HSBC as a longer-term play. But we must caution, the near-term could be bumpy and no returns are ever guaranteed.

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.

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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.

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Article history
Published: 1st August 2023