Investors breathe a sigh of relief as HSBC’s recently published half-year earnings report is better than expected.
HSBC (LON:HSBA), one of the largest banking and financial services institutions in the world, on Monday 1st August posted a pretax profit of US$9.2 billion during the six months up to June 30th. Although profits are technically down from the same period last year (US$10.84 billion) it is still above expectations, as the bank’s own analysts earlier predicted around US$8.15 billion in six-month profits.
It’s a very welcome result, especially after the first quarter of 2022 saw a reduction in pretax profits from the previous year of US$1.6 billion for the bank, with the Ukraine conflict, a weakened China market, shutdowns across Hong Kong due to the pandemic, and rising inflation cited as having a negative impact on business as a whole.
At the time, the bank warned that the outlook would possibly remain bleak for at least its next report, pointing to the prospect of further impairment provisions. Still, as Group Chief Executive, Noel Quinn, commented in his statement accompanying the first half numbers, the result, "reflects the continued impact of our strategy, with gathering revenue momentum and tight cost control".
Adding to the positive news, the bank lifted its target for returns on tangible equity, which is an important performance metric, from 10% budgeted earlier this year, to a minimum of 12%, representing the bank’s best results in a decade.
There was also a pledge from Quinn to re-introduce dividend payments from next year, which were halted in 2020, and later restored to around half of the previous amount in 2021, understandably causing shareholders to lose patience.
"We understand and appreciate the importance of dividends to all of our shareholders," stated Mr. Quinn. "We will aim to restore the dividend to pre-COVID-19 levels as soon as possible. We also intend to revert to quarterly dividends in 2023," he said.
As long as they achieve their performance targets, the bank expects to deliver an improved payout ratio of around 50% for 2023 and 2024. The news sparked an increase in HSBC shares, which jumped to their highest level since the beginning of February 2022 according to ActivTrades’ data. The CFD broker’s sentiment indicator also shows that most traders are optimistic about the bank’s stock price, as 66% are buying it and 34% selling (see bottom left corner of the chart below)
Daily HSBC chart - Source: ActivTrader online platform
Interest rates are a major driver of growth
Interest rates being on the rise globally has clearly had a significant impact on earnings for HSBC, and if rates keep increasing as expected then the bank’s net interest income will be trending up for at least the next 12 months, but some economists warn that an almost inevitable economic slowdown will hurt the banking sector eventually.
The Bank of England will likely lift rates by at least a quarter percent to 1.5% on Thursday, as inflation continues to run rampant, now at 9.4%.
A history-making half percentage increase hasn’t been ruled out yet and would put rates in line with international peers, with the European Central Bank (ECB) lifting rates by a half percent, and the United States Federal Reserve increasing rates by three-quarters of a percent last month, with more expected this week. This would be the first increase of this size in the more than 25 years since the bank became independent.
Calls for spin-off idea to be put aside
As one of HSBC’s major investors and one of China’s most valuable insurers, Ping An Insurance (HK:2318) has been calling for the bank to separate its Asian and western operations and re-list on the Hong Kong Exchange to unlock more value for shareholders.
The bank is due to discuss the proposal from Ping An at its meeting with shareholders today (Tuesday, 2nd August) but has so far pointed to negative impacts on the bank’s credit rating, tax bills and risks to operating costs when generally referencing the idea of a break-up in its Monday statement.
It’s almost an ironic situation given the history.
HSBC used to be one of the insurer’s biggest stakeholders, purchasing just over 10% of the struggling Ping An for US$600 million in 2002, before it eventually sold its share for a huge profit of $2.6 billion in 2012.
Although the bank is headquartered in London, the multi-listed institution generates much of its profits from Asia, with Ping An having turned the tables, now owning around 8.3% of the company’s shares and becoming a louder and more active voice in recent years.
Reuters reported Mr. Quinn as telling analysts that the bank sympathizes with shareholders that haven’t seen expected results for the past ten years. Under his leadership, HSBC has invested billions of dollars in the Asian continent in an effort to drive growth, and it appears to be paying off.
"According to our analysis, the average international customer generates around double the revenue of the average domestic customer." Said Mr. Quinn. "This is both our fastest growing customer segment and our most commercially attractive." He added.