HSBC profit up on Asia growth, resilient GBM

(Adds comments from CEO, analysts, details throughout)

By Thomas Blott

HONG KONG, Oct (Shenzhen: 000069.SZ - news) 30 (IFR) - HSBC's pre-tax profit soared five-fold in the third quarter as its post-crisis restructuring comes to an end and the bank switches its attention to growth, led by its Asian business.

HSBC said on Monday its profit for the three months to the end of September came in at US$4.62bn, up from US$843m in the same period last year when the bank booked a US$1.7bn loss following the sale of its Brazil operations.

Revenues grew 36% year-on-year to US$12.98bn - its third straight quarterly increase.

On an adjusted basis, revenues rose 3% to US$13.03bn and pre-tax profit dipped 1% to US$5.44bn. It blamed that on a fall in investment bank revenues and higher operating expenses due to performance-related pay and greater investment in businesses as it pursues higher growth.

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 HSBC more towards Asia, a far cry from regular and costly acquisitions made prior to the 2007/08 financial crisis.

He said that strategy is paying off, with lending growth in Asia up 17% in the third quarter from a year ago.

Gulliver is stepping down as CEO after full-year results are released at the end of February, and he expects his successor John Flint to remain focused on getting 'positive jaws' - increasing revenues faster than costs.

"I think John will continue to follow the mantra that revenues need to grow at a faster rate than cost growth," Gulliver said.

He said HSBC should deliver positive jaws for 2017, even though jaws were negative 1.3 percentage points for the nine months to the end of September.

He said Flint is likely to target modest positive jaws of 1.5 to 2 percentage points. "That's because we need to invest. There are very big challenges for the banking industry generally, not just HSBC," Gulliver told reporters on a conference call.

FICC DOWN, BUT NOT OUT

Adjusted profit in HSBC's global banking and markets division dipped 3% to US$1.54bn, but it fared better than rivals in most areas.

"GB&M has put in a resilient performance relative to peers," said Rohith Chandra-Rajan, analyst at Barclays (LSE: BARC.L - news) .

Its operating income for fixed income, currency and commodities fell 5% to US$1.35bn as weak credit and FX income outweighed a rise in rates. The average fall in FICC for the big five US banks was 22% and Deutsche Bank (IOB: 0H7D.IL - news) and Barclays did even worse.

HSBC's equities revenues rose 25% from a year ago to US$331m, compared with a flat performance across US banks.

In HSBC's global banking – or advisory and underwriting – revenues dipped 5% from a year ago, compared to an average 8% rise at US rivals, although HSBC's revenues include financing, which most banks do not.

After a strong first half of the year, GBM's revenues for the year to end-September are up 6% from a year ago at US$11.7bn, and its adjusted profit is up 19% at US$4.9bn, a far better showing than at most rivals.

HSBC 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, a bigger cull than its original target.

The bank’s switch to focus on Asia appears to be paying off too as the region's adjusted profit for Q3 rose 6% to US$4bn, accounting for three-quarters of group profit.

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

It said lending in Q3 in the southern Chinese city of Guangdong was up US$1.1bn from a year ago.

That is expected to continue or accelerate under HSBC veteran and incoming CEO Flint, who spent much of his early career in Asia, alongside new chairman Mark Tucker, who has also worked extensively in the region.

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 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, which has helped its plan to buy back shares.

It said it has bought back 71% of a US$2bn share buyback announced in July, but declined to comment on the timing or scale of any further stock repurchase plans. (Reporting by Thomas Blott in Hong Kong; Additional reporting by Steve Slater in London; Editing by Dharsan Singh)