HSBC capital jumps, busy DCM drives investment bank

By Thomas Blott and Steve Slater

HONG KONG/LONDON, Nov 7 (IFR) - HSBC reported a sharp drop in third-quarter profits after a US$1.7bn writedown on the sale of its Brazil unit, but revenues in its investment bank rose 13% due to a strong showing in debt capital markets.

HSBC said on Monday adjusted pre-tax profit in its global banking and markets division rose to US$2.5bn in the third quarter from US$1.93bn a year earlier.

That was mainly due to strength in DCM (BSE: 502820.BO - news) globally and rates and credit businesses in the wake of the uncertainty surrounding the UK's decision to leave the European Union.

Chief Executive Stuart Gulliver said GBM's performance in October had been similar to September.

He said the bank had won market share in DCM and in rates and credit in Europe, and also in global liquidity and cash management.

HSBC set out plans last year to slash GBM's risk-weighted assets by US$140bn and cut costs, and Gulliver said the business was doing well but needed to cut more costs and assets to lift returns in Europe and the US.

RWAs in the business were US$341bn at the end of September, down US$118bn from a year ago. The unit's return on risk weighted assets was 1.9% in the third quarter, well below HSBC's target of 2.6% for 2017.

"There undoubtedly need to be further efficiencies to gain, but not significantly different from the programme already embarked upon," Gulliver told reporters on a conference call.

"It's about relentless execution across a business model that has been in place for a number of years and is starting to differentiate, in part because in places like Asia-Pacific and the Middle East a lot of the competition has pulled away," he said.

Revenues from credit, rates and foreign exchange were $1.42bn in the third quarter, up 34% from a year ago, which was better than its European rivals but slightly behind the growth of US rivals. HSBC's rates revenues jumped 51%, while FX was up 4%.

HSBC had a bad quarter in equities, however, with revenues down 44% to US$187m, worse than a 7% decline across rivals.

The London-based bank reported a third-quarter pre-tax profit of US$843m, down 86% from a year earlier. Adjusted pre-tax profit was up 7% to US$5.6bn, excluding one-off charges.

The bank's common equity capital ratio jumped to 13.9% from 12.1% at the end of June, helped by a change in how UK regulators account for its 19.9% stake in China's Bank of Communications.

That removes concerns about HSBC's ability to sustain its dividend and should see it extend its share buyback plan, analysts said. The capital jump helped drive a 4% rise in its shares.

"For yield investors who have been the source of support for valuation of this stock, this keeps the stock in the safety zone into the next 6-9 months," said Chirantan Barua, analyst at Bernstein.

Analysts at Citigroup (NYSE: C - news) estimated the bank had a capital surplus of about US$8bn-$13bn, and upgraded their rating on the stock to "buy" from "neutral".

Asia remained HSBC's strongest region by far with pre-tax profit in the region up 3% at US$3.7bn, helping to offset losses in Europe and Latin America.

Since taking over as CEO nearly six years ago, Gulliver has made the bank's pivot towards Asia an integral part of his strategy, although some critics say the bank will struggle to generate new business due to strong competition from Chinese brokerage firms and slowing economic growth in the mainland. (Reporting by Thomas Blott in Hong Kong and Steve Slater in London)