Europe’s largest bank HSBC has had a strong few quarters as rising interest rates have boosted its income—and that of its shareholders, who stand to benefit from hefty share buybacks—but Wall Street still isn't totally convinced.
The same carried on for HSBC’s third quarter, as it reported a pre-tax profit of $7.7 billion—double what it made the same time last year—thanks to elevated interest rates globally. The bank also announced a new share buyback worth $3 billion, an optimistic sign for investors.
"We have had three consecutive quarters of strong financial performance,” HSBC CEO Noel Quinn said in a statement Monday. “We are pleased to again reward our shareholders. We have now announced three share buy-backs in 2023 totalling up to $7bn, as well as three quarterly dividends which total $0.30 per share.”
Despite the robust results, profits still missed analyst expectations of $8.1 million mean average estimate compiled by HSBC. The London-listed bank also said it expects costs to increase up to 5% as it considers bigger bonuses to bankers in the following quarter, Reuters reported.
“Costs are likely to be the area of controversy," Jefferies analyst Joe Dickerson told Reuters.
HSBC shares were down about 0.5% in early afternoon trading in London.
Chinese real estate pain
HSBC’s presence in Asia has been growing over the years—Hong Kong is one of the bank’s bases, and China made up about 44% of the bank’s 2022 profits. As a large chunk of its business remains steeped in China, pains in the country’s real estate markets have hurt the bank. In the third quarter HSBC added a $500 million charge to its credit losses—a provision typically made for loan defaults—linked to the commercial property market in mainland China.
The lender attributed the half-a-billion-dollar charge to “heightened economic uncertainty, inflation and rising interest rates, as well as from ongoing developments in the commercial real estate sector in mainland China,” it said in its earnings statement. The downturn has continued to rock investors as government measures have not quelled the crisis quite like it hoped to, and HSBC sees potential for “further deterioration in credit conditions.”
"There’s still a cloud of uncertainty hovering over the [Chinese] market, but investors will be happy to see no nasty surprises," Hargreaves Lansdown equity analyst Matt Britzman told Reuters.
Similar pressures have impacted fellow-lender Standard Chartered, which also has an Asia-heavy focus, as it reported a 30% drop in third-quarter profits owing to its exposure to Chinese real estate and banking players.
Despite the weak fundamentals, Quinn said he thinks the worst may be over for Chinese real estate, which could eventually pave way for growth.
“The sector itself has bottomed and it now has to recover from that new lower position,” Quinn said, according to the Financial Times.
Eyes everywhere
HSBC’s $3 trillion in total assets and $1.6 trillion in customer deposits makes it one of the world’s largest banks. Its business, therefore, spans markets across the globe.
Earlier this year, the company was under pressure from activist shareholders including Chinese insurer Ping An to spin off the company’s Asia business to improve shareholder returns. Although Ping An suspended its campaign in May, HSBC has continued to trim its holdings in some countries, including the sale of its Canada unit.
The lender, which makes its money predominantly from commercial banking as well as its retail and wealth management segments, also said it was keeping a watch on how the cost-of-living crisis impacted its customers.
HSBC has a large Middle-East presence, and despite the Israel-Hamas war, the bank’s chief said its strategy will remain the same, Bloomberg reported. For its part, HSBC said it was supporting its employees and clients impacted by the war.
