HSBC profits flat in third quarter as Gulliver's jaws turn negative
Led by its "pivot" back to Asia, HSBC continued to grow revenues across its three main businesses in the third quarter but increased investment and bonuses kept underlying profits flat.
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Adjusted revenue reported for the three months ended 30 September of $12.98bn was ahead of the consensus forecast of $12.7bn.
Adjusted profit before tax for the quarter fell 1.5% to $5.44bn, though this was ahead of the $5.41bn company-compiled consensus.
At the reported level, PBT surged to $4.6bn from $3.8bn in the same period last year thanks to higher reported revenue, lower reported loan-impairment charges of $0.1bn and a $0.2bn fall in reported operating expenses.
Chief executive Stuart Gulliver, who will hand over to his recently promoted successor John Flint in February, said the bank had continued to make good progress with the strategic actions we set out in 2015, chief of which was a renewed push into China and Asia.
"Our international network continued to deliver strong growth in the third quarter," Gulliver said in a statement on Monday, "our pivot to Asia is driving higher returns and lending growth, particularly in Hong Kong and the Pearl River Delta."
"Last week, HSBC became the first foreign bank to be approved as a joint-lead underwriter for Panda bond issuance by offshore non-financial corporates in the mainland China interbank bond market. This enables us to extend our coverage of debt-market products, and reinforces our position as the leading non-Chinese bank in mainland China."
He said revenues were driven by growth in loans and advances in all three main global businesses compared with the third quarter last year, while profits were held flat in the quarter due to higher investment for growth and more performance related pay awards.
Adjusted cost-to-income ‘jaws’, which are the difference between the rate of revenue growth and that of cost growth, were negative 4.9% in the third quarter which dragged the year-to-date performance from positive 0.5% in the first half to negative 1.3% with one quarter left to meet Gulliver's target of achieving positive jaws for the full year.
The target to achieve a return on equity of 10% also looks elusive, though considerable progress has been made, having risen to 8.2% in the year to date from 4.4% a year ago, though the 7.1% for the third quarter was below the 9.5% in the second.
At a regional level, while Asia contributed the greatest revenue growth and 70% of group adjusted profit in the first nine months of the year, Europe contributed its second quarterly loss of the year.
In terms of the divisional performance, there was good profit growth from Retail Banking and Wealth Management and Commercial, while Banking and Markets continued to grow revenue despite a challenging quarter for the industry as seen in other banks' results last week.
Areas of strategic progress Gulliver was able to boast included a further $13bn of risk-weighted asset savings in the quarter, taking HSBC further beyond his initial target, while the bank remains on track to achieve around $6bn of annualised cost savings by the end of the year, with a further $0.6bn of costs removed in the third quarter.
Shares in HSBC were down 0.4% to 745.2p in early trading on Monday.
"Management has made a big point about its ambition to deliver positive jaws for the full year, but the weak performance in Q3 makes this now look a much more challenging objective," said analyst Gary Greenwood at Shore Capital.
He added: "Although operational performance at HSBC is clearly improving, we believe that the shares have already run well ahead of what can be justified by current estimates and are already factoring in significant upgrades with returns well in excess of management targets. The group’s new Chairman, Mark Tucker, and incoming chief executive officer, John Flint, therefore have a significant challenge on their hands in order to live up to lofty market expectations, in our view."
Far from it, said Neil Wilson at ETX Capital, these were a strong set of numbers, with return on equity "getting there".
"As with all banks revenue growth is only as important as cutting out some of the fat. More good work from HSBC on this front with the bank on track to achieve circa $6bn of annualised cost savings by the end of the year.
"HSBC should be among the biggest beneficiaries from higher global interest rates, while the focus on faster-growing markets in Asia will continue to support."
Laith Khalaf at Hargreaves Lansdown noted that headline profits reported by the bank to $4.6bn in the last quarter from $843m a year ago was heavily skewed by the sale of its Brazilian operations in 2016.
"The retail and commercial banking arm performed pretty well but have been let down by a weak showing in the investment banking division. However this is against a backdrop of a market-wide downturn in fixed income trading, and actually HSBC has held up better than many of its competitors.
"Regionally it’s Asia which is doing the heavy lifting for HSBC, and while the bank is headquartered in the UK and is the second largest company in the FTSE 100, its business primarily resides in the far east. Indeed 70% of its profits so far this year come from Asia.
"The fortunes of HSBC are therefore largely tied up in the Asian growth story, for better or worse. As the CEO baton is about to be passed from Stuart Gulliver to John Flint, HSBC will hope to make good on its eastern promise."