HSBC Holdings plc (HSBA) Ordinary USD0.50
HL comment (28 October 2019)
Underlying revenues fell 2% in the third quarter compared to a year earlier, to $13.3bn, with profits before tax down 12% to $5.3bn. That reflects a weak result in the investment bank, $606m of compensation to customers and $120m restructuring costs.
Conditions are expected to remain difficult going forwards, and as a result the group no longer expects to achieve its profitability targets for 2020 - although the bank still intends to sustain the dividend.
The shares fell 3% in early trading.
HSBC's exposure to rapidly developing economies with growing populations, is fundamentally attractive. Unfortunately, poor returns in more established markets and macroeconomic headwinds mean there are several unwanted distractions.
Top of the list of concerns is probably the trade dispute between China and the US. Asia accounts for 80% of profits and HSBC's significant position in trade finance means it's particularly vulnerable. If China sneezes, HSBC will come down with a bad case of the flu. It doesn't help that within Asia, Hong Kong is a crucial market, and political turmoil there isn't good for business.
Funding Asian growth isn't cheap either, and operating expenses have been creeping up as a result. Increased investment in digital capabilities is also demanding significant quantities of cash, although on the plus side it should bring long term cost savings.
Meanwhile the supposedly safe and steady UK business is wrestling with the challenges a disorderly Brexit could bring. So far the group's weathered the storm better than many rivals, with loan growth offsetting margin compression in a competitive market. However, bad loans are creeping up - mostly in business lending at the moment and certainty not to danger levels, but something to keep an eye on nonetheless.
Underpinning both those problems is a less upbeat outlook for interest rates in the US. Banks have tended to do better when rates are rising, and with the Federal Reserve now far more likely to cut than raise rates, that's likely to mean the squeeze on interest margins continues for some time.
The man tasked with finding a path through those pitfalls is former CFO Noel Quinn, who seems to be in the middle of an extended interview for the top job at HSBC.
'Rebalancing capital to higher growth, higher return markets' is all well and good in theory. But the bank will need to find profitable uses for the capital once it's been extricated from the less exciting European and North American businesses. The Asian private bank could be one such opportunity, but it's not going to double in size overnight. It doesn't help that cutting costs is expensive in the short term (investment bankers are expensive to keep but pricey to fire too).
Still, the bank has consistently stood firm behind its 6.6% prospective yield and enjoys a healthy level of capitalisation together with longer-term growth potential. Given the economic environment, investors should be prepared to weather some ups and downs in the months and years ahead though.
Retail Banking & Wealth Management (RBWM) third quarter revenues were flat year-on-year at $5.6bn. A reasonable result in Retail Banking, credit cards and other personal lending businesses were offset by weaker life insurance manufacturing. Commercial Banking (CMB) saw revenues rise 3.8% in the third quarter to $3.8bn, with a good performance across the board. Both CMB and RBWM saw bad loans increase.
Third quarter revenues in HSBC's investment bank, Global Banking & Markets (GB&M), fell 14.7% year-on-year to $3.5bn. The bank put the fall down to reduced client activity due to economic uncertainty, although the bank did grow loans to customers. The Fixed Income, Currencies and Commodities business saw a particularly steep decline in revenues.
HSBC's Global Private Banking (GPB) saw revenues rise 10.5% to £472m, driven by a strong result in Asian investment and lending.
The bank's net interest margin - the difference between what it pays on deposits and earns on loans - for the year so far fell 0.08 percentage points compared to the same period last year. That's down to an increase in the cost of funding.
Loans to customers rose 7% compared to the same period last year. The bank finished the quarter with a CET1 ratio of 14.3%, a key measure of banking capitalisation, slightly above the long term goal of 14% despite a $1bn share buy-back.
The bank is taking new steps to rebalance capital from low returning markets such as Europe, the US and the non-ring fenced UK bank to higher growth, higher return markets. These may incur significant restructuring charges next quarter.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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