HSBC reported a 5% rise in second-quarter underlying revenue, excluding one-off items and ignoring currency impacts, to $16.5bn. Performance was driven by fee generating businesses like Wealth and Investment Banking, with net interest income flat.
Underlying profit before tax was up 7% to $8.9bn ($7.8bn expected). Net interest margin (NIM, a measure of profitability in borrowing/lending) came in at 1.62%, compared to 1.63% the prior quarter. Charges for expected loan losses totalled $0.3bn, down on last year and better than markets expected.
The CET1 ratio, a key measure of financial resilience, was 15.0% (14.0-14.5% target range). A dividend of $0.10 per share was announced, along with a new buyback of up to $3bn expected to complete over the quarter.
The shares rose 3.2% in early trading.
Our view
HSBC delivered a big profit beat over the second quarter as long-standing CEO, Noel Quinn, prepares to hand over the mantle. The beat was split evenly across strength in both underlying profitability, and lower impairments that we’ve also seen across other names in the sector.
Georges Elhedery’s will soon move from CFO to CEO and that continuity is positive in our eyes. Especially after the battles HSBC’s board has been through in recent years, to persuade shareholders that its strategy is the right one.
HSBC's exposure to Asia sets it apart from many of its large UK peers. Lacklustre growth for several years has brought significant pressure from a section of the investor base who want to see the business spin out its Asian operations. For now, the board's adamant that's not the right way to go, and the response is a renewed focus on higher growth areas.
There's progress on the portfolio reshuffle. The sales of the French and Canadian businesses have been completed, and the Argentinian operation has been sold and is due to be completed later in the year. Aside from shareholder returns, the capital freed up is being ploughed into what have been historically stronger-performing regions in Asia.
There's also a large global banking arm. Income is diverse, from trading in credit and currency markets to trading finance and payment solutions. Interest rates still impact some income streams, but not to the extent of more traditional banking operations. With interest rate tailwinds easing, we support the diversification this brings.
Now for the challenges. Costs in a higher inflation environment are a bugbear for almost everyone. HSBC has been on a cost-saving mission for years, but they remain a lingering issue. There are also ongoing challenges in the Chinese commercial real estate market, though we were pleased to hear management thinks the worst has come and gone.
The Asian focus is a differentiator from many of its peers, and we continue to see the potential for further growth from areas like wealth management. There's plenty of scope for shareholder returns with the balance sheet in a strong place. HSBC is our preferred UK-listed name for Asian exposure, though we prefer domestic-focused banks in the current environment.
Environmental, Social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, HSBC’s management of material ESG issues is strong.
HSBC faces risks from business ethics and product governance due to its involvement in related lawsuits and investigations. Its policies against money laundering, bribery, and corruption also have gaps. Although HSBC's credit and loan standards generally meet industry norms, its approach to client engagement on climate issues, particularly in Asia, lacks sufficient evidence.
HSBC key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.