HSBC in commanding position after these Q3 results

With strong foundations in place and with a reorganisation to come which should provide additional agility, HSBC Holdings (LSE:HSBA) is in a commanding position.

At first glance, the simplification into four new areas makes strategic sense both in terms of transparency as well what could prove to be a significant cost savings outcome as the management structure is flattened. It also marks the arrival of the new chief executive in earnest, who has put an early stamp on his arrival. The new units – Hong Kong, UK, Corporate and Institutional Banking and International Wealth and Premier Banking – should also lead at the very least to more focus on its core areas of business.

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HSBC has been 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. 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. Building economic connections between Asia and the Middle East, notwithstanding any geopolitical conflicts, is also creating emerging opportunities for HSBC with its sprawling footprint.

In this quarter, revenue within the Wealth unit rose by 16%, and for the Asian part of the business by 27%, adding to the strategic validation of the revamped business. There was also a strong contribution from the Global Banking & Markets operation, while customer account balances grew by $67 billion. These helped to propel revenue growth overall of 5% to $17 billion, and in turn to net profit of $6.1 billion, itself an increase of 9.2% compared to the corresponding period and comfortably ahead of the $5.4 billion which had been expected.

However, the numbers were not an entirely positive clean sweep. Net Interest Income declined by $1.6 billion to $7.6 billion (and by $600 million compared to the previous quarter), driven in part by deposit migration and the lingering effects of higher interest rates.

The Net Interest Margin subsequently slipped to 1.46% from a previous 1.7%, while the credit impairment charge of $1 billion was perhaps higher than had been expected, even though it reduced compared to the previous year by $100 million, with the major headwinds being the Chinese and Hong Kong real estate sectors. There was also an additional impairment within the Wealth unit, although net fee income rose to $3.1 billion, offsetting some of the caution.

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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 15.2%, an improvement of 0.2% from the previous quarter, the Cost/Income ratio of 47.9% is both impressive as well as declining from 49.3% and a Return on Tangible Equity of 14.4% is another improvement, from 13.5%, and comfortably in line with the group’s unchanged guidance for a full-year level in the mid-teens.

The subject of shareholder returns also remains in sharp 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.

Meanwhile, the ordinary dividend yield of 6.8%% is the highest in the sector by some margin and, with the special dividend previously announced, this figure jumps to 9.1%, 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. 

Overall, these are comforting numbers which leave HSBC a strong springboard on which to build as the business is reorganised. The longer-term potential for the Asian markets has been something of a blessing and a curse of late, with a faltering Chinese economy leading to underperformance for both HSBC and Standard Chartered (LSE:STAN) compared to UK peers.

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HSBC shares have nonetheless risen by 15% over the last year, as compared to a gain of 14% for the wider FTSE100. However, over the last three years the signals are clear and the Asia-facing banks have outperformed, with HSBC having added 57%.

The region remains one with immense potential and the growth story remains intact, if not currently fully in favour. Even so, the likes of HSBC already have an established and trusted brand which by definition provides an advantage, and the strength of the numbers could lead to some upward pressure on a market consensus which currently stands at a cautious buy.