High-yield HSBC delivers fresh show of strength

The HSBC Holdings (LSE:HSBA) model is slightly different from that of its UK banking peers, leading not only to a strong set of half-year numbers but also putting strong building blocks in place in order to continue its global significance.

The bank is moving towards a business which has less of a slavish reliance on interest rate movements and levels, with increasing focus on the growth in affluent wealth, especially in Asia. The group has been investing heavily in this move, giving HSBC higher, but more diversified, income streams.

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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.

As such, the bank pointed to further growth in revenues at its Wealth unit of 12%. In terms of diversification, there was also a strong performance from its Global Banking and Markets division in the six months to 30 June, where revenues rose by 5%, higher levels of wholesale lending and a stable return from transaction banking generally. These units combined provide a veritable arsenal of options, bolstered by a sprawling geographical presence, and something of an economic shield.

For example, the size and strength of the balance sheet gives the bank both protection and insulation from external economic pressures. The CET1 ratio, or capital cushion of 15% is comfortably above requirements, and even the rise in operating expenses, as the group continues to invest in technology while also fending off the impacts of inflation, is perfectly containable.

Elsewhere, a cost/income ratio of 43.7% is low by historical standards if not the immediately previous period, while Net Interest Margin and Net Interest Income remain stable, less than the preceding quarter but remaining above expectations. A reduction in credit impairment provision also reflects a gradually improving economic backdrop, while a Return on Tangible Equity (ROTE) number of 17% is among the highest in the sector.

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The subject of shareholder returns also remains sharply in future strategic focus. HSBC has announced a further £3 billion share buyback programme, in addition to one of the same size which has recently been completed.

The ordinary dividend yield of 7% is the highest in the sector by some margin and, with the special dividend previously announced as a result of the sale of the Canadian business, this figure jumps to 9.4%, a headline and obvious attraction to income-seeking investors. The scale of returns looks likely to continue as the business continues on its gargantuan revenue path. 

In terms of outlook, it appears that there is more good news to come. The group has upgraded its ROTE for this year and next to a number in the mid-teens, ahead of the 12% largely expected by investors, while Net Interest Income is also likely to rise to around $43 billion from a previously guided $41 billion. At the same time, the group will not be lessening its focus on the capital cushion, aiming for a range of between 14% and 14.5% which should provide further comfort.

At the headline level, both pre-tax profit of $21.6 billion and revenues of $37.3 billion for the half are largely stable from the corresponding period. A small improvement in the profit number in the second quarter was muddied by a number of releases and readjustments relating to business disposals and some previously strong comparatives, which will fall out of future releases. 

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The shares have reacted favourably to the numbers and the improved outlook in opening exchanges, having risen by 5% over the last year as compared to a gain of 7.5% for the wider FTSE 100.

HSBC’s sheer scale and power enables investment in further growth, shareholder returns and fresh areas of fee income such as within its various wealth management businesses. The market consensus of the shares, which currently stands at a 'cautious buy' on prospects, may come under some upward pressure following this latest show of strength.