HSBC counts the cost of massive overhaul

These are not results to shoot the lights out, but the areas in which HSBC Holdings (LSE:HSBA) is showing particular strength are those which will receive special attention following the group’s new refocus.

Changing horses midstream is never an easy task, and the previously announced transformation will have upfront costs which will delay the benefits of the anticipated savings. On the other hand, the rationale for a more focused operation is clear and should allow the group to reap the rewards of a higher focus on profit generation, while also keeping costs in check.

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In the meantime, and however the group is structured underneath, HSBC has massive momentum which leads to its famously strong and stable capital strength and has been shuffling the pack with regards to its portfolio, including but not limited to a loss of $1 billion from the sale of its Argentinian business and a gain of $4.8 billion from its Canadian disposal.

HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels. However, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering. 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, 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.

The results offer proof of a business making incremental progress at the group level. Pre-tax profit of $32.3 billion was 6.5% higher than the previous year, with revenue largely unchanged at $65.9 billion. Underneath the bonnet, an increase of 18% in Wealth and Personal Banking revenues (including a jump of 21% in fee income) was accompanied by strong growth in the Global Banking and Markets unit. This plays into the transformation towards the newly created areas of focus for the group, namely Hong Kong, the UK, Corporate and Institutional Banking and International Wealth and Premier Banking.

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However, the numbers were not an entirely positive clean sweep. Net Interest Income declined by 8.6% billion to $32.7 billion, reflecting the impact of business disposals while also being previously driven in part by deposit migration and the lingering effects of higher interest rates. The Net Interest Margin subsequently slipped to 1.56% from a previous 1.66%, while the credit impairment charge of $3.4 billion was stable although perhaps higher than had been expected. The lingering effects of the previous headwinds from the Chinese and Hong Kong real estate sectors were in evidence, while there was also an impairment of $1.8 billion in Commercial Banking within the number.

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 14.9%, an improvement of 0.1% from the previous year, the Cost/Income ratio of 50,2% is perfectly adequate, while an unchanged Return on Tangible Equity of 14.6% is in line with the group’s target over the next few years. 

The subject of shareholder returns also remains in sharp strategic focus. HSBC has announced a further £2 billion share buyback programme, which could bring a tinge of investor disappointment, since it is shy of the £3 billion levels previously announced.

However, there can be little doubt about the overall levels of shareholder returns, and an increase to the dividend propels the projected yield including specials to an extremely appealing 7.7%, which of course is an additional bonus to a share price which has also fired ahead on hopes of further additions to its gargantuan revenue path following the transformation.

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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 being something of a headwind more recently. HSBC shares have nonetheless risen by 41% over the last year, as compared to a gain of 13% for the wider FTSE100 and over the last three years the signals have been strong, with a 65% increase in the price.

The likes of HSBC already have an established and trusted brand in the Asian region which by definition provides an advantage, and the reorganisation should open the door to further growth. In the meantime, the group will need to work even harder to justify its premium rating among the banks, especially given its eye on the future, which is reflected by a current market consensus of the shares as a hold, albeit a strong one.