HSBC hails benefits from Brazil exit as underlying profits beat forecasts

HSBC reported that profits in the third quarter fell 86% compared to last year due to the disposal of its Brazilian bank, but underlying profits were higher in all four of its business functions and better than the market expected.

The FTSE 100 bank lifted revenues and continued to cut costs in the three months to 30 September, saying the Brazil sale had allowed it complete almost two thirds of a $2.5bn share buyback as well as maintain its ongoing dividend.

On a reported basis, revenue fell 37% to $9.5bn in the third quarter, with reported profit before tax shrinking 86% to $0.84bn.

However, reported profits were hit by several exceptional items, including a $1.7bn loss from the Brazil disposal, $1.0bn of restructuring costs, $1.4bn of negative movements in its own debt as credit spreads tightened and $0.5bn of UK customer redress charges, together with a $658m drag from the strengthening US dollar.

Stripping this out, adjusted revenues were up 2% to $12.79bn and PBT climbed 7% to $5.6bn, with profit growth in four out of five regions and a better-than-expected 4% reduction in costs helping profits beat the consensus analyst forecast of $5.1bn.

Chief executive Stuart Gulliver said the benefits of the Brazil sale were apparent, despite the lost profits.

"This is another action forming part of our ongoing capital management of the Group that reinforces our ability to support the dividend, to invest in the business and, over the medium term, to contemplate share buy-backs, as appropriate. It also provides us with a significant capacity to manage the continuing uncertain regulatory environment."

HSBC expects to finish the buyback programme by the end of 2016 or early in the first quarter of 2017, depending on market trading volumes in the fourth quarter, while it has made $2.8bn of annualised cost savings and is on track to achieve our 2017 cost-saving target as well.

The bank's balance sheet was also in better shape, thanks to a change in capital requirements for Chinese bank BoCom, allowing the common equity tier-1 capital ratio to increase to 13.9%.

Broker Shore Capital noted that the bank had chosen to take $1.0bn of restructuring charges below the line, thereby flattering the underlying position, but for the full year it perceives gentle upside pressure on its full year adjusted pre-tax forecast of $19.8bn, which equates to adjusted diluted earnings per share of $0.65.

ShoreCap expects further share buy-backs will follow in 2017 and beyond, modelling for an ongoing $2.5bn per year on top of management's commitment to maintain the dividend at the prior year level.

"We currently forecast the dividend being maintained in 2016 at $0.51, with a cut to $0.34 in 2017 reflecting our view that underlying earnings will come under further pressure due to challenging market conditions, although this pressure could be partly relieved if US interest rates begin to rise - although noting that second order effects from such an increase are hard to forecast," they added.

Laith Khalaf at Hargreaves Lansdown said effects of HSBC's refocus on its Asian roots on the results "showed you can’t make an omelette without breaking eggs" but that the underlying business numbers from HSBC were pretty positive.

"Like the other UK banks, low interest rates are depressing returns on HSBC’s lending activities, and there has been a jump in provisions for bad loans, though these remain at relatively low levels," he said.

"The market seems to be gaining confidence that HSBC is going to be able to maintain its dividend, and the bank now trades on a forward yield just above 6%, compared to almost 8% earlier in the year. That’s still pretty high, but has been pared back by a resurgent share price, which has risen by around a third over the last three months."

Shares in HSBC were up nearly 5% to 623.3p by lunchtime on Monday.