HSBC adds further buyback as interim profits beat forecast

HSBC unveiled a share buyback of up to $2bn this year alongside a better-than-expected increase in first-half profits.

Revenues in the half-year to 30 June of $26.2bn fell 11% compared to the same period last year mainly due to currency movements and the sale of its Brazilian business.

Reported profit before tax rose 5% to $10.2bn, with adjusted profit before tax up 12% to $12.0bn. The consensus forecast was for profits nearer $9.5bn.

Earnings per share of $0.35 (19.3p) was 38% ahead of consensus.

Making use of its strong capital position, with a common equity tier 1 ratio standing at 14.7% at 30 June from 13.6% at the end of 2016, the board expects to complete a $2bn share buyback by the end of the year, follows an earlier $1bn buyback announced in February and the payment of two dividends totalling $0.20. A second interim dividend of 10 cents per share was confirmed.

Since setting on a path in 2015 to cut costs and refocus the business more towards Asia, the first half saw annualised run-rate savings reach $4.7bn and regulatory approval received for the establishment of what will later this year be the first joint-venture securities company in mainland China majority-owned by a foreign bank, HSBC Qianhai Securities.

Reported operating expenses were down 12% in the half to $16.4bn, though adjusted operating expenses were up 3% partly due to a credit in the prior year relating to the 2015 UK bank levy, as well as investment in growth programmes, primarily in Retail Banking and Wealth Management where investments were partly funded by one-off disposal proceeds.

The bank made an extra $300m provision for PPI claims, as like UK peers Lloyds and Barclays it has seen an increase in claim volumes.

Chief executive Stuart Gulliver said: "Our three main global businesses performed well, increasing profit before tax and growing market share in many of the products that are central to our strategy. We remain on track to complete the majority of our strategic actions by the end of the year."

Chairman Douglas Flint, in his last set of results before retirement, said the bank's performance in the period was down to strong contributions from across the group: "Markets-based revenues benefited from market share advances, commercial banking customer activity was robust, wealth management and insurance revenues were notably stronger in Hong Kong, and credit experience globally remained remarkably sound."

He said there were uncertainties and potential pitfalls for growth "arising from increasing geopolitical tensions and ambiguous predictions around the shape of transition to, and final form of, the UK's future relationship with its major trading partners in the EU" post-Brexit, but said the bank was proving its resilience.

On the company's outlook, Flint and CEO Stuart Gulliver guided to an increase of circa $0.5bn in second half expenses above consensus expectations, primarily “incremental investment in growth opportunities”.

FLINT'S REGULATION WARNING

Flint also set out his concerns about the global fragmentation of regulation: "The new administration in the US is leading the rest of the world in applying a retrospective lens to the aggregate of regulatory changes implemented and proposed in the aftermath of the global financial crisis. This fresh look, focusing on simplification and supporting economic growth, is to be welcomed. Earlier concerns that it could lead to fragmentation of the international regulatory concordat have substantially dissipated following supportive comments from senior US officials regarding continuing active participation in the international regulatory bodies."

However, he said there were still concerns, particularly in Europe, that outstanding work streams may be addressed over different time frames globally.

"This, too, would lead to a fragmented framework with the risk of skewing financial market activity to where the capital support required is lightest. Such an outcome has to be avoided to prevent capital misallocation, and is particularly pertinent for traded markets activity. The best outcome remains early finalisation of what has already been agreed globally in principle, and a further agreement that remaining regulatory changes will be implemented in lockstep across the major jurisdictions."

REACTION AND ANALYSIS

HSBC shares topped 770p -- levels last sustained in 2008 before the financial crisis hit home -- in early trade on Monday, and by just after 1100 BST were up 2.25% at 760.3p.

Analysts at Goldman Sachs said the results were "solid", with the forecast beat mainly driven by resilient revenue trends in both retail especially Hong Kong, broadly flat after a very strong first quarter and broadly flat Global Banking and Markets, and
higher corporate centre contribution.

Goldman noted that costs were 3% above consensus owing to investments in growth, but that the impact was offset by lower
impairments thanks to better trends in oil and gas and higher associate income.

"We believe the key market focus will be on the improved revenue and capital formation trends. Whilst favorable market conditions in Asia were supportive (HK retail), we see the strong loan growth achieved in 2Q17 as an encouraging data point.

"Finally, with HSBC’s CET1 ratio edging towards 15%, investors will undoubtedly focus on what implications this could have for future capital returns (beyond 2017)."

Broker Hargreaves Lansdown agreed the bank has had a good start to the year, helped by rising revenues, falling costs and fewer bad debts, noting that following the shares' spectacular rise over the last year, "HSBC now accounts for around 6% of the UK stock market, so almost anyone in the country with a pension has an interest in how the bank performs".

And that interest is in the global economy, as three quarters of the bank's profits come from Asia. "This means the key driver of the bank’s performance will be the east, not the west, positioning the bank well to capitalise on the growth of developing Asian economies, though that of course comes with a risk warning attached," Hargreaves said.

Investec noted that expenses disappointed but that impairments were better than expected and the share buyback was "widely expected".

Analysts said the revenue performance in GBM, which was flat QoQ and up 7% YoY, compared particularly favourably versus more fixed income and currency-reliant peers.

Return on equity improved to 8.8% but after allowing for the benefit from usual seasonality within this outturn, Investec struggle to see HSBC achieving near 10% RoE before 2020, though its forecasts are under review.