HSBC Holdings plc (HSBA) Ordinary USD0.50

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HSBC reported a 6% rise in third-quarter total income, adjusted for one-off items and ignoring currency impacts, to $17.2bn. Growth was driven by fee generating businesses like Wealth and Investment Banking, with adjusted net interest income down 2% to $10.9bn.

Underlying profit before tax was up 10% to $8.7bn ($7.7bn expected). Net interest margin (NIM, a measure of profitability in borrowing/lending) came in at 1.46%, compared to 1.62% the prior quarter. Charges for expected loan losses totalled $1.0bn, down $0.1bn on last year.

The CET1 ratio, a key measure of financial resilience, was 15.2% (14.0-14.5% target range). A new buyback of up to $3bn was announced.

No change to full-year guidance, pointing to net interest income of around $43bn.

The shares rose 4.0% in early trading.

Our view

HSBC delivered a big profit beat over the third quarter, driven entirely by the more volatile fee and trading income units. Management gave an upbeat tone around that continuing into the fourth quarter, but there are a few lingering questions about how sustainable that is, and whether there’ll be material charges associated with restructuring plans.

On that point, Georges Elhedery is now settling into the CEO seat and plans to simplify the structure across four new business lines. Details so far have been limited so we’ll have to wait for full-year results in February for more specifics on expected costs and benefits. What has been made clear though is that there aren’t any plans to split up the business, a longstanding challenge that HSBC leadership has faced.

Aside from plans for a new structure, a portfolio reshuffle has been ongoing for some time. 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.

Traditional banking is the key driver of income but finding growth has been a bugbear. As the interest rate environment softens, loan growth will be needed to help support interest income. We think this needs to be a key area of focus if it wants to achieve the target of mid-single-digit growth in the medium term.

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 challenge 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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