HSBC’s results provide palpable relief

HSBC’s financial strength continues to be a beacon set against a challenging backdrop for the sector, writes head of markets Richard Hunter.

HSBC Holdings (LSE:HSBA) may have found growth hard to come by over recent years, but its sheer scale and financial strength sets it apart in times of turmoil, as recently witnessed in the banking sector.

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Indeed, the huge spike in pre-tax profits saw the benefit of two tailwinds, one of which was the acquisition of Silicon Valley Bank UK, for which the bank booked a provisional gain of $1.5 billion. In addition, a previous impairment relating to the sale of the French retail banking business was reversed as the transaction has become less certain, adding a further boost of $2.1 billion to the numbers. As such, pre-tax profit rose from $4.1 billion to $12.9 billion in the first quarter, significantly ahead of the expected $8.6 billion. Even without the SVB UK and French adjustments, the figure is comfortably ahead of estimates.

Another key driver came from the benefits of a rising interest rate environment, where HSBC’s global reach has again paid dividends. As a result, revenues spiked by 64% to $20.2 billion, underpinned by an increase of 38% to $8.96 billion of Net Interest Income. The NII figure compared to a figure of $6.5 billion the year previous and exceeded estimates of $8.85 billion.

The growth was also helped along by strong performances from each of its divisions. In particular, Global Banking and Markets saw spikes in foreign exchange and debt trading markets while the Wealth and Personal Banking unit reaped the benefit of increased customer activity following the reopening of the mainland Chinese border post-pandemic restrictions. Margin compression at the Commercial Banking unit was a small blot on the landscape, but in the overall scheme of things the reduction was minimal.

Perhaps unsurprisingly, HSBC’s financial strength continues to be a beacon set against a challenging backdrop for the sector. The capital cushion remains at a comfortable 14.7%, up from 14.1%, the Liquidity Coverage Ratio is far above minimum regulatory requirements at 132% and the return on Tangible Equity spiked from 7.2% to 19.3%. The number is an improvement from the figure of 12.3% recorded in the previous quarter and leaves the bank well on track to achieve its target of 12% for this year and beyond.

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Operating expenses were also lower by 7%, while the latest credit impairment charge of $400 million compares with a number of $642 million a year previous, as the bank considers that some of the pressures arising from inflation and interest rate rises are near to peaking, but nonetheless prudently taking a charge in case of any disruptions to that central case.

At the same time, the financial largesse has been extended to shareholders with the announcement of a share buyback programme of up to $2 billion, as had previously teased at the time of the full-year results in February. A quarterly dividend was also reintroduced for the first time since pre-pandemic, with the likelihood of further returns remaining high in the current environment. In the meantime, a dividend yield of 4.4% remains attractive to income-seeking investors, in addition to any capital gains being made.

There is an unwelcome distraction coming from shareholder noises which are suggesting an isolation of the Asian business to unlock further value. However, this remains contrary to HSBC’s tradition of globally interconnected banking and one which it fully intends to continue to resist. More broadly, the turmoil of recent months has enabled the bank to flex its financial muscles and reiterate its power. Although the shares have been caught in the crosshairs of recent banking concerns and have dipped by 4.5% over the last three months, this has not been enough to unravel a stronger performance of late. The share price has risen by 30% over the last six months, largely due to the Chinese reopening, and over the last year has posted a gain of 16%, as compared to a rise of 4% for the wider FTSE 100. The relief from these results is palpable and has been well received in early exchanges, while the market consensus of the shares as a buy will most likely remain firmly intact.