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HSBC - profit jumps, fresh buyback

HSBC reported a 40% rise in revenue over the third quarter to $16.2bn.

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HSBC reported a 40% rise in revenue over the third quarter to $16.2bn. There was a 16% uptick in net interest income, as higher rates provide a tailwind, plus a larger gain from non-interest income. However, there were several items impacting the comparable period last year that inflated reported growth.

Net interest margin (NIM, a measure of profitability in borrowing/lending) came in at 1.70%, compared to 1.51% last year and 1.72% the prior quarter.

Customer deposits were down 3.5% from last year, but broadly stable quarter-on-quarter. In the retail division outflows in the UK were offset by inflows across Asia.

Operating costs were ahead of expectations, driven by tech spend and performance-related pay. Charges for expected loan losses totalled $1.1bn, with $500m in relation to Chinese commercial real estate assets. Profit before tax rose $4.5bn to $7.7bn (growth again benefited from one-off charges in the comparable period).

The CET1 ratio, a key measure of financial resilience, was 14.9% (14.0-14.5% target range ). A dividend of $0.10 was announced along with a buyback of up to $3bn.

The shares were broadly flat in early trading.

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Our view

As usual, there's some noise to look through in these results. Largely the massive impairment charge taken in the comparable period last year, which is why the year-on-year profit growth levels are quite so extreme. Under the hood, costs were a little higher than expected and there's a question mark on how they'll evolve over 2024. But apart from that, performance was pretty good.

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 down a touch from the second quarter but better than analysts expected.

HSBC's exposure to Asia, which accounts for a little less than half of all customer accounts last we heard , sets it apart from many of its large UK peers. Lacklustre growth for several years has brought 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 and Canadian businesses looking like they'll go through early next year. Aside from the potential for shareholder returns, the capital freed up is being ploughed into what have been historically stronger-performing regions in Asia.

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, but they remain a lingering issue. The only real change to guidance with third-quarter results was on costs, now expected to tick higher this year and into 2024.There are also ongoing challenges in the Chinese commercial real estate market which is leading to higher costs taken in preparation for defaults.

The Asian focus is a differentiator from many of its peers, and we continue to see the potential for further growth from areas like wealth management. There's plenty of scope for shareholder returns with the balance sheet in a strong place and at depressed valuations, HSBC is our preferred UK-listed name for Asian exposure. 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: 30th October 2023