Boring returns
HSBC (LON:HSBA) needed to demonstrate that its new year was off to a reassuringly boring start, after reaching peak face-palm with an unexpected multibillion write down in the final quarter of 2016.
First quarter numbers largely achieve that, though it's another lost quarter with regard to the path back to sustainable returns on equity. Average returns retreated. Return on average tangible equity (RoTE) fell back below the medium-term target of at least 10%. That means the stronger, less encumbered and expanding bank that CEO Stuart Gulliver believes is buried under a stream of balance sheet effects and regulatory remediation was not greatly evident during the quarter.
If we exclude operating results from the Brazil business that HSBC still owned in Q1 2016, and changed accounting treatment of debt fair value, RoTE would have poked above 10% by 1.1 points. But both of those impediments will linger throughout 2017, says HSBC. In other words, virtual, rather actual achievement of its returns target this year will be as good as things get. Such returns matter, of course. They are one of the few ways to keep a handle on why it’s worth remaining invested in HSBC. Like several global lenders, the group is comprised of an ideal bank, where profits rose 12% in Q1, and a real one where, profits plunged 18%.
Buybacks will be back
In the context of its ambivalent update, HSBC’s decision to pause pay-outs on top of dividends for the time being, looks curiously timed on the surface. After all, the stock has been drifting off four-year peaks since late February. However, top management has been across the wires over the last fortnight with strategically placed messages stressing commitment to dividends, and that has reassured investors. CEO Stuart Gulliver’s plea that HSBC be allowed “to catch our breath a little bit” is also a strong enough hint that buybacks will resume before too long.
The group has also painstakingly manoeuvred itself into an improved capability to buoy total returns. Progress on risk weighted asset reduction has been solid. The advance of HSBC’s critical regulatory capital buffer to 14.3%, up 70 basis points, was also faster than the 10bp expected. The group also confirms that potential advantages from US dollar rate rises are beginning to feed through, even if the offset from a weak UK base rate and mortgage competition will linger. Elsewhere, the group finally reported promising progress on the Pearl River Delta opportunity, where customer advances rose 17% on the year.
All told, conditions for HSBC shares to continue their recovery from Brexit vote lows improved in the quarter. That doesn’t mean the group’s ability to grow is any less problematic, just that a sense of corporate stability has returned after last year’s upsets.
Investors can be more assured that HSBC has returned to its primary purpose of generating free cash flow.
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