HSBC Holdings plc (HSBA) Ordinary USD0.50
HL comment (26 April 2022)
First quarter underlying revenue fell 3.2% to $12.5bn year-on-year, largely reflecting declines in Wealth and Personal Banking. That offset the effects of a $38.6bn increase in reported loans and advances to customers, to $1.1trn.
Underlying pre-tax profit of $4.7bn was down compared to $6.3bn, despite a small reduction in operating expenses. HSBC recognised an impairment charge of $642m, which was better than the market expected.
Regulatory changes and market conditions contributed to a weaker capital position, as measured by the CET1 ratio. HSBC therefore said further buybacks for 2022 are unlikely.
The shares rose 2.6% following the announcement.
The first disappointing trend to come from first quarter numbers is the weaker capital position. The fall in HSBC's CET1 ratio - a key measure of a bank's capitalisation - reflects regulatory changes and the effect of hedging interest rates.
For investors, that means further share buybacks are unlikely until that position improves. This likely flies in the face of expectations, where rising global interest rates had been expected to help boost financial performance, and therefore shore up shareholder returns.
The other unhelpful trend is a build-up of reserves. Wider macro-economic conditions means HSBC has had to put aside hundreds of millions of dollars. That's partly owed to an uncertain economic outlook. The group's also facing the effects of uncertainty in the Chinese commercial real estate sector, as well as exposure to Russian counterparties which are expected to be impacted by the Ukraine crisis. This is a reversal of earlier trends which saw HSBC release provisions, boosting profits along the way, as the world first emerged from Covid, and loan defaults looked better than predicted.
There's also the problem of surging Covid cases in HSBC's home market of Hong Kong. Reduced equity market activity, wealth management slowdowns and closed branches all took their toll. That's significant - Hong Kong is an integral part of HSBC's strategy to become more Asia-focussed. 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.
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. That's being compounded by sluggish conditions in Asia, which may well persist for some time.
There are bright spots. A buoyant housing market is helping to improve performance - mortgage lending's up $24bn year-on-year. And at the Net Interest Income level, rising interest rates are helping the overall picture. Expectations for further rate increases have fed into a positive revenue outlook for this year.
HSBC's diverse business model, including a large investment banking arm, provides some relief in tougher times too. 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.
HSBC's capital position though weakened, is still impressive. The giant has a mammoth balance sheet, with $700bn in surplus deposits.
Ultimately, HSBC's Asian focus means it could offer more opportunity than domestic peers. As a banking giant, HSBC's fortunes will track the wider economy, so economic uncertainty rising, ups and downs are more likely in the medium term. We don't expect HSBC to crash in times of recovery, but we don't predict it will shoot the lights out either.
HSBC key facts
- Price/book ratio: 0.63
- Ten year average Price/book ratio: 0.88
- Prospective dividend yield (next 12 months): 4.7%
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.
First quarter results
The impairment charge included around $250m for Russian counterparties and roughly $160m relating to Chinese commercial real estate (CRE).
Net interest income was helped by higher interest rates, especially in Europe. There was also a $30bn increase in deposit balances, with mortgage lending up $24bn. As a result, net interest income was $7.0bn, compared to $6.5bn last year. The net interest margin rose to 1.26% from 1.21%.
Net fee income fell 9.7% to $3.1bn. There was a 3.5% increase in Commercial Banking underlying pre-tax profit to $1.8bn, and a 35% fall in Global Banking and Markets to $1.8bn, partly reflecting lower Global Debt Markets and Principal Investments revenue.
Wealth and Personal Banking was held back by unfavourable market impacts in life insurance manufacturing and lower investment distribution revenue in Hong Kong. Pre-tax profits fell to $1.1bn from $1.9bn.
HSBC's CET1 ratio, which is an important measure of a bank's capitalisation, fell to 14.1%, from 15.8% at the start of the year. The group warned: "volatility in equity from financial instruments held as economic hedges of net interest income may result in our CET1 position temporarily falling below our target range during 2022".
The bank achieved a return on tangible equity of 6.8%, down from 10.2%.
Looking ahead, HSBC expects growth in net interest income, supported by rising interest rates in some economies. It also expects mid-single-digit percentage lending growth for the year. It also said the ongoing situation in Ukraine and inflationary pressures make the forward economic outlook hard to predict.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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