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HSBC - profits rise, uncertainty in China

Full year underlying revenue fell 3% to $50.1bn, largely reflecting low interest rates...

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Full year underlying revenue fell 3% to $50.1bn, largely reflecting low interest rates. That offset a strong increase in trade balances and a $23bn increase in loans and advances to customers.

A significant reduction in provisions and other charges for bad loans helped underlying pre-tax profit rise 79% to $21.9bn. All regions were profitable in the year, with the UK business seeing an especially strong result.

In the final quarter, HSBC recognised a c.$500m charge for expected credit losses, most of which relates to uncertainty in China's commercial real estate sector. Impairment charges were much higher than the market was expecting.

The board's approved a second interim dividend of $0.18 per share, taking the final yearly payment to $0.25. A further buyback of up to $1bn was announced and will start after the current $2bn programme has finished.

The shares fell 2.0% following the announcement.

View the latest HSBC share price and how to deal

Our view

The market had a negative response to higher-than-expected impairment charges, a lot of which relates to uncertainty in the Chinese commercial real estate sector. This is certainly something to be keeping an eye on, but it shouldn't be forgotten that HSBC had no exposure to the riskiest asset class, as at the end of December. That makes the bigger picture more important.

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 although interest rates have been hiked in some economies, they're still low by historical standards. Asian economies - to which HSBC is largely exposed - are also dragging heels when it comes to raising rates. There are also concerns that higher rates in the US will slow down recovery in Asia.

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, and agreed the sale of its US mass market business. The capital freed up by the reshuffle is being 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.

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.

A capital position well above target should mean shareholder returns 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

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.

Full year results

Net interest income of $26.5bn was lower than last year's $28.3bn, as net interest margins fell to 1.2% from 1.32%. Loans and advances to customers were $1trn.

Net fee income was more positive, rising to $13.1bn from $11.9bn. There was a 30.8% increase in Commercial Banking underlying pre-tax profit, and a 24.3% rise in Global Banking and Markets.

The group spent $6bn on technology in the year. This was offset by cost savings on an underlying basis, with underlying operating expenses falling 1% to $32.1bn. The bank's cost:income ratio was 64.2%, up from 62.6%.

HSBC's CET1 ratio, which is an important measure of a bank's capitalisation, fell slightly to 15.8%, as returns to shareholders offset capital generation.

The bank achieved a return on tangible equity of 8.3%.

Looking ahead, HSBC expects mid-single-digit lending growth in the new financial year, despite a weaker Wealth performance in Asia in the current quarter. The group said: "our net interest income outlook is now significantly more positive" - if interest rate rises are in-line with expectations, HSBC expects to deliver a return on tangible equity of at least 10% for 2023.

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: 22nd February 2022