HSBC shares hit 4-year high as profits double

There's lots to like about this global bank, including booming profits, a yield above 5% and an upgraded outlook. Our head of markets explains what makes these results so special.

HSBC Holdings (LSE:HSBA) has brought down the curtain on an otherwise mildly disappointing bank sector reporting season in some style, displaying both growth and financial strength through its sheer scale.

The group is planning to exit less profitable areas as part of its transformation process. As a result, the terms of the exit of the French retail banking business have now been revised and are scheduled to complete early next year, alongside the wind-down of its Canadian business. The exit from Greece is now complete, there is a planned withdrawal from Russia and the nature of its presence in Oman is being revamped.

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As such, the group is moving away from the transformation to concentrate on value creation. It has already undertaken any number of initiatives, such as the launch of a global private banking business in India and is looking to grow its fee income further, particularly in the potentially rewarding area of its wealth business in Asia generally.

Despite spinning so many plates, the group remains focused on its business as usual, and the rising interest rate environment has provided a strong tailwind. Net Interest Margin, which has been the source of some disappointment within competitor numbers, rose to a healthy 1.7% from 1.24%. Meanwhile, Net Interest Income from the period rose from $13.4 billion to $18.26 billion which, alongside previously announced adjustments on the acquisition of Silicon Valley Bank UK and the French operation, turbocharged revenues to $36.9 billion from a previous $24.6 billion. As such, pre-tax profit for the half-year more than doubled from $8.8 billion last year to a $21.7 billion this time, again underlining the scale, reach and power of its global presence.

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At the same time, a sharp focus on operating costs, which decreased by 4%, has added to the increased revenues in vastly reducing the cost/income ratio, which now stands at 41.9% as compared to 65.7% a year previous. Meanwhile, the annualised Return on Tangible Equity has ballooned to 22.4% from 10.6% and has led to an upgrade on the outlook, where the bank now expects growth in the mid-teens for the full year, versus a previous estimate of 12%. The upgrade also extends to a Net Interest Income projection of over $35 billion from its previous guidance of over $34 billion.

The balance sheet remains in unsurprisingly rude health, with a capital cushion, or Tier 1 ratio of 14.7% also showing an improvement despite higher shareholder distributions. A further share buyback scheme of up to $2 billion has been announced, its second this year of the same size. Another dividend distribution has also been confirmed, underpinning a yield of 5.2% which remains attractive in the current environment.

Of course, there remain hurdles with which the bank has to contend, such as an inflationary environment which remains high even though there are some signs of weakening. The commercial real estate sector in mainland China is another potential thorn in the side, while weaker customer demand for wholesale lending has been seen, especially in Hong Kong and Europe, although there are currently few signs of stress in the bank’s UK mortgage book, for example. HSBC has chosen not to take any chances in this regard, and has set aside a credit impairment of $1.3 billion, which is marginally higher than the $1.1 billion of the corresponding period.

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Overall, the release is a tour de force which has been achieved through a combination of higher income, lower costs, the reshaping of the business, all while driving growth. The announcement of a further share buyback and upgrades to its guidance leave little for detractors to focus on. 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 26% over the last year compares with a gain of 4% for the wider FTSE100 index, and there is little to suggest that the market consensus of the shares as a 'buy' will be threatened in any way following these numbers.