3rd Aug 2015 13:17
LONDON (Alliance News) - HSBC Holdings PLC on Monday reported a 10% increase in first-half pretax profit, driven by its operations in Asia, and offered the first evidence of progress on a strategic plan to exit underperforming businesses with confirmation of a deal to sell its Brazilian business at above tangible book value.
FTSE 100-listed HSBC, the world's third-largest bank by assets, reported a USD13.63 billion pretax profit for the six months to the end of June, up from the USD12.34 billion reported for the first half of 2014. HSBC's interim dividend remained at USD0.20 per share.
Revenue, defined as net operating income before loan impairment charges and other credit risk provisions, increased to USD32.94 billion from USD31.17 billion. Operating expenses were up to USD19.19 billion from USD18.27 billion, and impairment charges for bad loans and other provisions for credit risk fell to USD1.44 billion from USD1.84 billion.
"Our performance in the first half of 2015 demonstrated the underlying strength of our business. Our diversified, universal model enabled the group to deliver increased profitability in spite of slow global growth. In particular, a strong revenue performance across our Asia businesses helped drive increased profits and Global Banking and Markets had a good six months," Chief Executive Stuart Gulliver said in a statement.
The sale of the Brazilian business to Banco Bradesco SA for USD5.2 billion in cash, a price that is 1.8 times tangible book value, will cut risk-weighted assets at HSBC by about USD37 billion, 13% of the overall USD290 billion reduction the bank is targeting by 2017. Analysts at Japanese investment bank Nomura said HSBC is making "good progress" in running down risk-weighted assets.
The sale of the Brazilian operations is expected to complete by the second quarter of 2016, with HSBC to retain a corporate banking presence in the South American country to serve international clients.
"The fact that the value of the deal exceeds expectations indicates a competitive bidding process. This was already expected given the current macroeconomic environment in Brazil in which is difficult for banks to attract clients and enlarge their market share," said Francisco Alegrias, an economist at research house IHS Global Insight.
HSBC's results come nearly two months after the global banking giant revealed plans to cut risk-weighted assets by a quarter and redeploy the liberated capital to more profitable areas of the group. HSBC said it cut risk-weighted assets by about USD50 billion in the first half compared with the end of June last year, mostly by selling assets in its Global Banking and Markets division, which is essentially its investment bank, and disposing of part of its shareholding in Industrial Bank, among other measures. It redeployed USD30 billion into higher returning areas.
Gulliver said the group will return surplus capital to shareholders if it is unable to deploy capital in areas that can generate a return on equity of 10%, and told journalists on Monday the board will likely begin to assess such a move from December 2016.
HSBC detailed its plan to cut risk-weighted assets at an investor day on June 9, when it set itself new targets of saving between USD4.5 billion and USD5.0 billion per year by 2017. The strategy, which also confirmed the intention to sell its loss-making operations in Brazil and Turkey, is aimed at improving returns and dividends.
"We have commenced our work to reduce costs and expect to be able to demonstrate tangible progress in the coming quarters. Fulfilling these actions will also entail a number of one-off transformation costs, some of which will be incurred during the second half of 2015. We expect the largest portion of these costs to fall in 2016," Gulliver said.
The CEO said the bank is concentrating on making "significant progress" on its strategy in the remainder of the year, and that shareholders will be updated on progress on a quarterly basis from November. HSBC had a "satisfactory" performance in July, he added.
"We are hopeful for a modest improvement in the world economy in the second half of the year. More accommodating monetary conditions should help the mainland Chinese economy to stabilise after first half challenges. US economic growth is also likely to accelerate. Thanks to lower oil prices, real incomes are rising across much of the eurozone and in the UK," Gulliver said.
Chairman Douglas Flint said the environment for banking remains challenging because of uncertainty over economic conditions in the eurozone, where talks between debt-stricken Greece and its creditors continue, and in China, where the stock market has been sliding since rallying in April and May.
Asia was the main driver of HSBC's performance in the half, with pretax profit from the region increasing to USD9.40 billion from USD7.89 billion in the prior year period, meaning it contributed 69% of the total. Its Retail Banking and Wealth Management division's pretax profit increased to USD3.36 billion from USD3.00 billion in the same period, helping to make up for lower contributions from Commercial Banking, Global Banking and Markets, and Global Private Banking.
HSBC is under pressure to improve returns and cost efficiency after coming short on its previous targets, and the bank's results featured new figures for two of the bank's key measures.
HSBC's annualised return on equity was 10.6%, which was higher than the group's aim of a return on equity above 10%, although lower than the 10.7% recorded in the first half of 2014. Return on equity, a key measure of profitability for shareholders, has been under pressure at HSBC, which used to target a ratio of between 12-15% but cut this target in February this year.
Its 58.2% cost efficiency ratio - a measure of expenses as a percentage of net operating income before loan impairment charges and other credit risk provisions - was an improvement on the 58.6% seen in the first half of 2014, and moves the bank closer to its mid-50s target.
First-half results were hurt by USD1.14 billion charge for settlements and provisions in connection with legal matters. The charges come in addition to the USD1.19 billion in provisions and fines relating to authorities' investigations into alleged currency market manipulation in the final half of 2014.
Charges for customer redress in the UK, where HSBC has been caught up in mis-selling payment protection insurance and interest rate hedging products, fell to USD137 million from USD234 million.
The cost of past misconduct threatens to tarnish a year in which HSBC is celebrating 150 years since it was founded in Hong Kong to finance trade between Europe and Asia.
HSBC's reputation took a beating in February after allegations that its Swiss private banking unit helped wealth clients to aggressively avoid taxes were reported by several news organisations. In its annual report for 2014, HSBC said there had been "unacceptable" behaviour at the unit in the past. Those revelations followed fines in the UK and the US in November 2014 as part of a foreign exchange settlement that involved five other global banks. It took USD147 million in regulatory provisions in its global private banking division in the half.
Authorities have been regulating the banking sector more strictly since the global financial crisis of 2007-09, raising their emphasis on areas such as conduct and compliance, as well as increasing capital requirements on lenders.
HSBC, which shifted its headquarters to London in 1992 with the acquisition of Midland Bank after 127 years in Hong Kong, gave little news on its review of whether to leave the UK.
The UK's bank levy, a tax on global balance sheets, is now being gradually reduced over the next six years. An 8% surcharge on profits will be imposed on banks alongside the levy, which will be imposed on UK balance sheet liabilities only from 2021.
The tax system is one of at least 11 criteria that HSBC is known to be considering in its review of whether to leave London, and the bank reiterated that it intends to conclude its assessment by the end of the year.
Ratings agency Standard & Poor's said Hong Kong is the most likely destination for HSBC if it does decide to move, and that such a relocation in itself would be unlikely to affect its ratings on the group.
"However, the process would be complex and lengthy, and has the potential to divert senior management attention away from executing the bank's revised business strategy, which it unveiled in June and includes some ambitious financial targets," Standard & Poor's said.
Gulliver told journalists that HSBC is awaiting further clarification about new rules that will require UK banks to ring-fence retail operations from investment banking activities from 2019. He said HSBC has received no approaches for that part of its business, and that it is too early to tell whether the group will be the best place for it once the ring-fence is implemented.
HSBC's ring-fenced bank, which is likely to include a "very big chunk" of revenues, will be headquartered in Birmingham, and Gulliver told journalists to work on the assumption that the group would like to keep it because of its good returns and the UK's profitable banking market.
"Depending on the shape of the ring-fenced bank and whether or not we could control its risk appetite, its strategy, appoint its CEO and get control over its dividends, we may find ourselves in the position of being an asset manager which wouldn't be sensible for us since people don't buy our stock to buy someone else's stock," Gulliver said.
HSBC shares were up 0.3% at 582.00 pence on Monday afternoon.
By Samuel Agini; [email protected]; @samuelagini
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