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HSBC - profits beat consensus, but uncertainty ramps up

Underlying revenue rose 27.7% to $40.0bn in the first nine months of the year...

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Underlying revenue rose 27.7% to $40.0bn in the first nine months of the year, reflecting an increase in net interest margin (the difference between how much a bank earns in interest on loans, compared to what it pays on deposits). There was a $3.3bn rise in net interest income, driven by higher interest rates.

On a quarterly basis, the group's total underlying loans and advances to customers fell $18bn, the fall was partially offset by higher mortgage balances in the UK and Hong Kong.

Quarterly underlying pre-tax profit was 8% better than analysts expected, coming in at $6.5bn. However, the bank also recognised $1.1bn of expected credit losses - provisions put aside because of higher economic uncertainty and continued weakening of mainland China's commercial real estate sector.

HSBC's CET1 ratio (a key measure of capitalisation) was 13.4%, lower than the minimum 14% targeted.

For 2023, HSBC now expects net interest income of $36bn, higher than planned, because of higher interest rates.

The shares fell 3.8% following the announcement.

View the latest HSBC share price and how to deal

Our view

Banks' net interest margins, which show the difference between what they receive in interest payments compared to what they pay on deposits, are direct beneficiaries of rising interest rates.

Expectations for further rate increases have fed into a positive revenue outlook and the benefits of HSBC's diverse business model are still very much intact. The group has a large investment banking arm, providing some relief in tougher times. 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.

Now for the challenges. HSBC has been on a cost-saving mission for years. The latest tactic involves limiting underlying cost growth to 2% for the full year. That's an admirable plan, but a tough ask in the current, inflationary, environment.

The rising interest rate environment also increases risk. Events triggered by higher rates first start with prosperity, in the form of fatter interest income for banks, but the final sphere kicked out by that very momentum is looking like it'll be recession. Sharp economic contractions hurt all banks, although HSBC's more diverse income streams should take some of the sting away.

These difficult conditions make it an interesting time for the group's well-regarded CFO to step aside. The tough balancing act ahead won't be lost on his successor.

These weaker economic conditions are why HSBC's putting provisions aside to prepare for a higher level of loan defaults. The group has particular exposure to the weakened Chinese commercial real estate sector.

It's also worth keeping in mind that Hong Kong is an integral part of HSBC's strategy to become more Asia-focused. This includes selling its French retail operation, and the US mass market business. The capital freed up by the reshuffle is being ploughed into historically stronger-performing regions in Asia, which make up about 80% of reported pre-tax profit. Asia's in a politically and economically sensitive time, which means ups and downs are more likely, and HSBC will feel the brunt of this.

Questionable growth is behind pressure from the group's biggest shareholder to split the business into its Asian and non-Asian parts. While nothing formal is on the table, it's something investors should keep in mind.

HSBC's capital position is also weakened. That means it's likely to be some time before buybacks return. But HSBC expects to pay out 50% of its earnings for the 2023 financial year, which looking at current earnings predictions, suggests the current dividend yield is at least sustainable. Please remember, no dividend is guaranteed.

Ultimately, HSBC's Asian focus means it could offer more opportunity than domestic peers, and we note the current valuation is below the longer-term average. As a banking giant, HSBC's fortunes will track the wider economy, so there will be some bumps in the road.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 25th October 2022