HSBC profit up as Asia drives growth

By Thomas Blott

HONG KONG, Oct (Shenzhen: 000069.SZ - news) 30 (IFR) - HSBC reported an almost fivefold increase in pre-tax profit for the third quarter as its post-crisis restructuring comes to an end and the bank switches its attention to growth.

Its reported profit for the three months to September 30 came in at US$4.62bn versus US$843m for the same period last year, as revenue grew 36% year on year to US$12.98bn - its third straight quarterly increase.

That was largely the result of a weak third quarter last year, most notably due to a US$1.7bn loss booked following the sale of its Brazil operations.

Adjusted revenue was up 3% to US$13.03bn. Adjusted pre-tax profit dipped 1% to US$5.44bn due to higher operating expenses, which was attributed to an increase in performance-related pay and greater investment across retail and wealth-management businesses.

Adjusted pre-tax profit for the nine months ending September 30 was up 8% to US$17.41bn.

Investors and analysts interpreted the results as another sign the bank’s turnaround, which CEO Stuart Gulliver started in 2011 and accelerated in 2015, is gaining traction.

Gulliver has sold assets, cut costs and pivoted the bank more towards Asia, a far cry from regular and costly acquisitions made prior to the 2007/08 financial crisis.

The bank said it had made a further US$13bn of reduction in risk-weighted assets in Q3, taking its total RWAs extracted since 2015 to US$309bn, above its original target.

The bank’s strategy to switch its focus to Asia appears to be paying off too as reported pretax profit for Q3 in the region rose 10% to US$4.03bn.

The bank has made expanding its footprint in the fast-growing Pearl River Delta region a key part of its strategy. It had previously said it would be hiring 4,000 staff to help with the push.

It said on Monday that lending in Q3 in the southern Chinese city of Guangdong was up US$1.1bn on an annual basis.

Adjusted profit at the lender’s global banking and markets division dipped slightly to US$1.54bn from US$1.58bn after a difficult quarter across most of its product lines.

Net (LSE: 0LN0.L - news) operating income on an adjusted basis for global banking – or advisory and underwriting – stood at US$943m versus US$995m a year earlier.

For the first three quarters of the year, income for global banking increased 4% to US$2.89bn after a good first half for debt capital markets.

Income across its markets business was down slightly in Q3 as gains in equities were offset by declines in revenue from foreign exchange, rates and fixed income, currencies and commodities.

Revenue for FICC, which makes up the largest portion of the bank’s global markets business, fell 6% to US$1.35bn due to lower market volatility. That was still better than a number of its competitors, with Deutsche Bank (IOB: 0H7D.IL - news) last week reporting a 36% decline in FICC revenue.

HSBC veteran John Flint, who is poised to take over from Gulliver as CEO, inherits a bank in better shape than most of its peers.

With Flint, who spent much of his early career in Asia, at the helm, alongside chairman Mark Tucker, who has also worked extensively in the region, analysts expect the bank to accelerate its push into Asia.

The main challenge will be lifting its return on equity, which stood at 7.1% at the end of quarter, below the bank’s target of 10%.

HSBC also wants to improve its "jaws" - the difference between revenue growth and cost growth - which was negative 4.9% at the end of Q3. The bank said it was committed to achieving positive jaws by the end of the year as costs come down.

The bank’s common equity Tier 1 ratio stood at 14.6% at the end of September, down slightly from 14.7% at the end of June.

It is also expected to repatriate up to US$10bn of capital stuck at its US subsidiary after the US Federal Reserve last year gave approval for its US arm to pay a dividend to the group.

This will help bolster the bank’s CET1 ratio and will also support further share buybacks, which has buttressed its share price in recent months.

The bank said that, as of October 26, 71% of its US$2bn share buyback, announced in July, had already been completed.

HSBC has pledged US$5.5bn in share buybacks since the second half of 2016. (Reporting by Thomas Blott; Editing by Dharsan Singh)