July 31 2024: HSBC Holdings announced a $3 billion buyback and raised its income outlook on Wednesday, showcasing its progress in safeguarding its business from potential declines in global interest rates, which could affect lending returns.
The bank’s shares increased by 3% in London as investors reacted positively to its stable first-half profit growth, increased wealth management revenue, and reduced losses in the Chinese real estate sector.
Europe’s largest bank also set a new target for its return on average tangible equity, aiming for mid-teens by 2025, aligning with its 2024 estimate.
HSBC, set to welcome new CEO Georges Elhedery in September following Noel Quinn’s retirement, has successfully reduced its sensitivity to interest rate cuts through a structural hedge insurance strategy.
A 1% fall in global interest rates in 2022 would have slashed $7 billion from HSBC’s annual revenue, but Quinn reported that the potential impact has now decreased to $2.7 billion.
“It’s significant that the sensitivity to interest rates has reduced. While it has performed well with rising rates, this trend may reverse quickly,” said Iain Pyle, a portfolio manager at HSBC shareholder abrdn, to Reuters.
Jefferies analyst Joe Dickerson added that the new return target and better-than-expected earnings should reassure investors.
“The valuation, considering the discount to book value for a targeted mid-teens return on tangible equity, suggests it is well-priced for a high-quality bank with growth potential,” said abrdn’s Pyle. The Asia-focused bank announced an interim dividend of 10 cents per share, following a 31-cent payment last quarter.
The $3 billion buyback follows a $5 billion buyback earlier this year. Under Quinn’s leadership, HSBC has returned $36 billion in dividends and $18 billion in buybacks to shareholders.
For the first six months of this year, HSBC reported a pretax profit of $21.6 billion, slightly down by 0.4% but above the $20.5 billion average estimate by brokers compiled by HSBC.
Wealth revenue rose to $4.3 billion from January to June, a 12% increase from the same period in 2023, driven by higher investment distribution and private banking income, alongside growth in asset management and life insurance.
NEW CLIENTS SURGE, CHINA LOSS NARROWS
HSBC emphasized its commitment to its core markets in London and Hong Kong, noting an 8% increase in international customers to 2.7 million in January-June, with 345,000 new account openings in Hong Kong.
The bank also observed easing pressures from China’s slowing economy and property sector, after recording a $3 billion writedown last year.
Revenue in HSBC’s Global Banking and Markets investment banking unit grew by 5%, benefiting from a boost in its equities business, reflecting trends seen in rival banks.
Overall, HSBC slightly adjusted its guidance, estimating credit loss to fall within a 30 to 40 basis point range for the full year, down from around 40 basis points the previous year. It also revised its net interest income forecast to about $43 billion, up from at least $41 billion.
Operating expenses rose by approximately 5% year-on-year to $16.3 billion in the first half, due to increased technology spending, inflationary pressures, and changes in bonus payment timing.
HSBC also appointed Jonathan Bingham as interim group chief financial officer, effective September 2. Bingham, who joined HSBC in 2020 after two decades at KPMG, will continue his duties as global financial controller while the bank searches for a permanent CFO.
