HSBC flags $3bn share buyback as Q3 profits swell

HSBC Holdings (LSE:HSBA) has brought down the curtain on a largely forgettable banks’ reporting season in largely positive fashion, still reaping the benefits of size but missing estimates on a couple of metrics.

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In particular, investors could focus on cost guidance, where the group amended its forecast for the year for costs to rise by 4% as opposed to the previously guided 2%. Operating expenditure rose by 2% in the third quarter (although is currently down by 2% in the year to date), which HSBC is attributing to higher technology costs, inflationary pressures and the potential for performance-related pay pressure at the year end.

Even so, the larger picture remains firmly intact, despite the new guidance. The cost/income ratio was still a healthy 49.3% in the latest quarter, comparing to 47.1% in the second. It is equally clear, though, that HSBC has the financial muscle and sheer scale to withstand the current challenges.

Of course, the economic backdrop in the UK is uncertain, and the bank is keeping a watchful eye on the commercial real estate sector in China, as mentioned by Standard Chartered (LSE:STAN) last week. The group is taking few chances for these issues to flare up, with a further credit impairment provision of $1.1 billion, taking the total to $2.4 billion so far this year.

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Otherwise the key metrics are largely in fine shape, with a higher interest rate environment continuing to help boost the coffers. Net Interest Income rose from $8 billion to $9.25 billion, the capital cushion or CET1 ratio improved to a healthy 14.9% from 14.7%, while the Liquidity Coverage Ratio was ample at 134%.

The Net Interest Margin (NIM) which has rather undone some of the group’s competitors over the last week also showed a small sign of weakness, although at 1.7% was only marginally lower than the previous quarter’s 1.72% and well in excess of the 1.51% reported in the corresponding period. The Return on Tangible Equity is still forecast to hit the mid-teens for the year as a whole, and kept in line with a number of 14.6% in the third quarter, itself a major bounce from 6.8% a year previous.

As such, the third quarter headline figures were notably resilient. Revenues rose by a significant 40% to $16.2 billion, while pre-tax profit jumped from $3.2 billion to $7.7 billion, albeit slightly shy of market expectations of $8.1 billion. In turn, the outlook for the remainder of the year was largely unchanged, with Net Interest Income forecast to exceed $35 billion.

The strength of the trading and balance sheet positions has enabled HSBC to announce a further share buyback programme of up to $3 billion, which takes the cumulative total to $7 billion in this year alone. The financial largesse was also maintained at the dividend level, where a current yield of 5.9% remains fairly punchy and of interest to income-seeking investors.

In terms of growth, the group is still in the process of exiting less profitable regions. Apart from this, HSBC is moving to concentrate on value creation and has already undertaken any number of initiatives, such as the launch of a global private banking business in India while looking to grow its fee income further, particularly in the potentially rewarding area of its wealth business in Asia generally. Indeed, in the latest quarter the bank saw $34 billion of net new invested assets, and of the year to date figure of $67 billion, $42 billion has come from Asia. 

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In all, HSBC is managing to shield itself from economic attack through its sheer size, while also remaining mindful on the importance of continuing to grow the business, especially in areas where it has particular strength.

The announcement of a further share buyback leaves little for detractors to focus on, despite a couple of minor misses. Although the recovery of the Chinese economy is currently faltering, prospects remain many and varied for HSBC, which is part of the reason for the recent outperformance of the share price.

A rise of 33% over the last year compares with a gain of 3.4% for the wider FTSE100, with little to suggest that the market consensus of the shares as a 'buy' will be threatened in any way following these numbers.