HSBC interim profits up 5% as operating expenses increase

HSBC said interim pre-tax profits rose 5% to $10.7bn (£8.23bn), reflecting a net favourable movement in significant items and favourable currency translation, but higher expenses were still a drag on the results.

Adjusted profit before tax of $12.1bn was 2% lower, as revenue growth and lower expected credit losses were partly offset by higher operating expenses. Revenue rose by 4% to $27.3bn.

Operating expenses of $17.5bn were 7% higher, primarily reflecting investments to grow the business, HSBC said. The bank’s has poured money into its retail and investment banking units in Hong Kong and China.

“Our investment in the first half included hiring more front-line staff in our strongest businesses and expanding our digital capabilities in core markets, both of which will improve the service we offer customers,” chief executive John Flint said.

“Our first-half reported and adjusted operating expenses rose as a consequence, which contributed to a drop in adjusted profit before tax. We continued to benefit from a low credit-loss environment in the first half.”

In June Flint outlined a three-year plan to invest $15bn-$17bn in areas such as technology and in China, as part of a shift to growth from cost-cutting.

Pre-tax profits from Asian operations increased 23% to $9.4bn, representing 88% of total pre-tax profits.

In a lengthy section on the bank's legal disputes, HSBC also revealed that last month it reached a $765m settlement-in-principle to resolve the claims from the US Department of Justice's civil claims relating to its activities on residential mortgage-backed securities.

Flint said retail banking and wealth management, and commercial banking were the strongest performing businesses as both continued to gain from a positive interest rate environment, and used the benefits of past investment to grow lending and deposit balances, particularly in Asia and the UK.

“Adjusted revenue growth in retail banking and wealth management was underpinned by higher retail deposit balances and strong wealth Management product sales in Hong Kong. We also grew our share of the UK mortgage market.”

“Our aim for this next strategy phase is to build on these strengths to grow profits consistently, leading to the creation of value for shareholders. With a period of significant restructuring now behind us, and with monetary policy in the US-dollar bloc normalising, it is now time to realise the potential of the group.”

"We remain cautiously optimistic for global growth in the remainder of the year. In particular, the fundamentals of Asia remain strong despite rising concerns around the future of international trade and protectionism."

The bank added that it had appointed Jonathan Symonds, formerly chairman of HSBC Bank plc, as its deputy chairman.

UBS said HSBC's 1H18 CET1 ratio of 14.2% was "a strong absolute number but came in 20bps below market expectations, down 30bps".

It also said that with "negative jaws" reported in the second quarter, where expenses exceed income, the bank would need "strong momentum" to deliver a positive figure over the full year.

Shore Capital was even more bearish, marking the shares a 'sell' negative stance with a fair value of 625p (13% downside).

"While profit performance was slightly ahead of expectations we view the income performance and negative jaws as disappointing," the broker said.

"Furthermore, we continue to believe that an improvement in returns beyond our own and consensus expectations is required to justify the current share price. As a cheaper alternative, we would recommend investors consider a basket of Barclays (buy at 189p), Lloyds (buy at 63p) and Standard Chartered (buy at 689p)."