HSBC (LON:HSBA) is already shuffling its pack to prepare for growth in its most profitable areas, but now faces the additional distraction of anticipating a deteriorating global backdrop.
As such, its guidance comments are revealing but unsurprising. The group fully recognises that heightened uncertainty and a faltering economic outlook are already having a negative effect on business and consumer sentiment in its core regions. It has made an additional $200 million of impairment provisions, taking the total for the moment to $900 million, but reiterates that it enters this phase of uncertainty in rude financial health.
For investors, another area of concern is that with the convoluted tariff situation still playing out, the implications are as yet unclear and in some cases yet to come into full effect.
In the meantime, some of the headline numbers have been muddied by previous disposals of the units in Canada and Argentina, which on the one hand have reduced revenues for the quarter compared to the corresponding period, while also missing the comparative of some $3.7 billion of net proceeds, which are obviously not recurring.
This resulted in a pre-tax profit of $9.5 billion, a 25% decrease, but ahead of estimates of $7.8 billion. Revenues fell by 15% to $17.6 billion, although this was still higher than the estimated $16.7 billion. The lack of Canadian and Argentine revenues also impacted the Net Interest Income figure, which declined from $8.65 billion to $8.3 billion; however, the figure was $100 million ahead of the previous quarter.
Another positive is that stripping out the disposal effects, on an adjusted basis, the pre-tax profit of $9.8 billion was $1 billion higher than the previous year.
Even so, there is rarely any doubt as to the group’s financial muscle, and these numbers reiterate that might. The capital cushion, or CET1 ratio, remains at a comfortable 14.7%, the Cost/Income ratio of 45.9% is perfectly adequate, while an adjusted Return on Tangible Equity of 18.1% is in line with the group’s target over the next few years.
The subject of shareholder returns also remains in sharp strategic focus. HSBC has announced a further £3 billion share buyback programme, which offsets the tinge of disappointment following a cut to the dividend, although even after the reduction a projected yield including specials of 5.5% remains extremely appealing. This is also an additional bonus to a share price which has also fired ahead on hopes of further additions to its gargantuan revenue path following the transformation.
Whereas HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering. The group has been investing heavily in this move, giving HSBC higher, but more diversified income streams.
Apart from the longer-term potential for the key Chinese market, the group previously identified areas such as India and Vietnam as being some of the fastest growing economies at present, while the building economic connections between Asia and the Middle East, notwithstanding any geopolitical conflicts, are also emerging opportunities for HSBC with its sprawling footprint.
Early signs of success are evident from $22 billion of new invested assets in the quarter, $16 billion of which emanated from Asia.
The longer-term potential for the Asian markets has been something of a blessing and a curse of late, especially with heightened tensions between the US and China compounding what had been a faltering Chinese economy. The reorganisation will also bring costs of $1.8 billion over the next two years, although they should then settle at ongoing annual savings of $1.5 billion.
Prospects nonetheless remain bright, with the Hong Kong, International Wealth and Premier Banking business and the trading unit within Commercial and Institutional Banking continuing to bear fruit. This has been recognised in a share price which has risen by 26% over the last year, as compared to a gain of 3.4% for the wider FTSE100 and over the last three years the signals have been even stronger, with a 69% increase in the price.
The likes of HSBC already have an established and trusted brand in the Asian region, which by definition provides an advantage, and the reorganisation should open the door to further growth. The more immediate overhang perhaps weighs on a market consensus, which currently comes in at a hold, albeit a strong one.