HSBC kicks off first share buyback

By Steve Slater

LONDON, Aug 3 (IFR) - HSBC has kicked off its first share buyback with plans to repurchase US$2.5bn of stock this year, thanks to capital from the sale of its Brazilian business.

It (Other OTC: ITGL - news) said it could buy back a similar amount of stock next year, because it is being allowed to pull back surplus cash from its US business for the first time in a decade.

HSBC also said it will keep its dividend at its current level "for the foreseeable future", which gave comfort to investors in Europe's biggest bank and lifted its shares, despite a 45% slump in second-quarter profits.

Pre-tax profits in the three months to June 30 were US$3.61bn compared with US$6.57bn a year ago. That left profits for the first-half at US$9.71bn, down 29% from the first six months of 2015.

Profits in global banking and markets in the second quarter rose 10% from a year ago to US$1.89bn. For the half-year, GBM's profits fell 16% to US$4.01bn, hurt by a 46% slump in equities revenues.

HSBC's shares rose 3.7% by midday as investors were cheered by the buyback.

"As the announced buyback has been approved by the PRA we believe this is a positive vote of confidence from the UK regulator on HSBC's ability to generate capital and manage any change in regulatory requirements," said Ronit Ghose, analyst at Citigroup (NYSE: C - news) .

The buyback marks a significant shift for HSBC.

It and other banks have been building capital over the last decade to meet tougher capital rules, but even before the financial crisis HSBC did not buy back shares - it preferred to spend surplus cash on acquisitions.

CEO Stuart Gulliver has reversed that strategy and sold 88 businesses since taking over at the start of 2011.

That included the sale of HSBC Bank Brazil last month for US$5.2bn.

It also sold its US credit card business in 2013 and half its US bank branches, which left it with surplus cash in the US. Regulators have not allowed it to return that surplus until now.

The US Federal Reserve has given permission to pay a dividend in 2017, its first since 2007. The bank said that also reflected its success in running down US sub-prime loans and restructuring its US business.

HSBC declined to say how much the US dividend will be, but said it could underpin a possible second buyback.

"We don't yet know what the size of that would be, but you should assume it would be somewhere in the same range as the one we're doing now to make it worthwhile," Gulliver said.

He said the bank was not introducing a rolling buyback programme, but will make one-off decisions.

"Where there is a one-off type event, like when we've sold a business, and we no longer need the shares that supported that business, we will consider buying back those shares."

Gulliver said the bank's long-standing "progressive" dividend policy has been scrapped, but it would not cut the payout as some investors had feared.

"That (progressive) is no longer the dividend policy of the firm, but what we will do is set out a commitment to sustain the annual ordinary dividend at current levels for the foreseeable future," he told reporters on a conference call.

The full-year dividend will be held at US$0.51 a share, offering a yield of 7.5% a year.

EQUITIES SLIDE

GBM's net operating income in the first half was down 13% from a year ago to US$8.9bn, dragged down by equities, where revenues fell to US$575m from US$1.07bn a year ago. All banks have had a bad year in equities as clients reduced activity amid volatile markets.

Its foreign exchange revenues in the first half fell 6% from a year ago to US$1.49bn and banking revenues dropped 2% to US$1.78bn. But rates revenues rose 16% to US$1.12bn and credit revenues increased 6% to US$506m.

"I don't think we have a structural problem with our equities business at all, so we don't need to do any particular changes to it. Credit and rates did well, cash and liquidity management did well, so the business is well diversified and resilient," Gulliver said.

HSBC is shrinking the size of GBM as part of its plan to reduce the capital it needs and improve returns. GBM's risk-weighted assets were US$437bn at the end of June, down by US$15bn in the second quarter and by US$54bn in the past year. (Reporting by Steve Slater)