HSBC kicks off UK bank sector results

There are two ways to view these Q3 results, explains our head of markets, but this company is making slowing but steady progress, and remains focused on evolution.

Slowing but steady progress is being made in numbers, which are probably more robust than they first appear, especially when set against the current raft of challenges.

The figures are markedly skewed by two large provisions that entirely change the quarterly result. Pending the sale of its French banking operations, HSBC Holdings (LSE:HSBA) has set aside a provision of $2.4 billion, while due to wider economic uncertainty there is a further $1.1 billion set aside for potential bad debts, bringing the cumulative figure this year to $2.2 billion. The latter provisions compare with releases of $700 million and $1.4 billion last year, so that the material swing has fed straight through to the headline numbers.

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

There are therefore two ways to view the results. On the one hand, the provisions have meant that net profit has decreased by 46% to $1.91 billion (although ahead of the expected $1.15 billion), pre-tax profit has fallen by 42% and revenues by 3%. However, the adjusted numbers reveal a different picture, with adjusted pre-tax profit rising by 18% and revenues by 28%. This shows that the underlying business remains in rude health, with the bank taking an extremely conservative approach to the current outlook.

This may have some merit. The group is largely dependent on its Asian income, and the current parlous state of the commercial real estate sector in China is a clear concern. In addition, inflationary pressure has notably reduced real wages for customers, which in turn heightens the likelihood of loan defaults. At the same time, the group is not immune from the wider global pressures of volatility arising from the possibility of recession, rising interest rates and geopolitical conflict, which is having a detrimental effect on sentiment and prospects.

• UK bank sector Q3 results season
• How will Hunt’s tax plans impact Lloyds and NatWest?
• Insider: two stocks for turbulent times get director backing

Against such a backdrop, the numbers are relatively resilient. Net Interest Income has risen to $8.58 billion from $6.6 billion (and better than the expected $8.2 billion), and Net Interest Margin has increased to 1.57% from 1.19%. Costs remain relatively contained against an increasingly tough backdrop, with the cost/income ratio edging higher to 68.7% from 66.5%, while the provisions have also fed through to shaving the CET1 ratio, or capital cushion, to 13.4% from 13.6% at the end of the previous quarter.

Amid the immediate trading challenges, the group remains focused on an evolution, which should be of benefit longer term. The move towards digitisation continues apace, including significant technology investment, the hybrid working model has already allowed the reduction of some office space and indeed branches, while the Asian region on which the bank depends for most of its profit still has much to give.

In the meantime, the sheer scale of the balance sheet results in a financial position which to some extent sets the group aside from some of its peers, while the diversity of the group by business and geography provides some kind of insurance. The current dividend yield of over 5% is a clear attraction for investors, while a prudent policy will allow for further shareholder returns as the broader economic picture clears.

Despite some initial disappointment with the provisions in early exchanges, the share price has generally reflected the benefit of the bank’s significant presence, having risen by 9% over the last year, as compared to a drop of 3% for the wider FTSE 100. HSBC may be an elephant which does not gallop, but it continues to make incremental progress as recognised by a market consensus for the shares which remains at a buy.