28th Oct 2019 12:23
(Alliance News) - HSBC Holdings PLC on Monday reported a sharp drop in third-quarter profit as the Asian-focused lender ramps up its restructuring plans amid "challenging" conditions.
Shares in HSBC were 4.2% lower in London on Monday at 591.40 pence each. In the year to date, the shares are 8.6% lower.
For the three months ended September, pretax profit narrowed 18% to USD4.84 billion from USD5.92 billion a year prior. This was after operating income fell 3.2% to USD13.36 billion from USD13.80 billion.
Net interest income slipped 1.4% in the quarter to USD7.57 billion from USD7.68 billion a year before.
In the first nine months of 2019, pretax profit is up 3.7% to USD17.24 billion with net interest income broadly flat at USD22.81 billion.
Richard Hunter, head of markets at Interactive Investor said: "Not only are these numbers disappointing and light of expectations, but it seems that things will get worse before they get better."
Geographically, HSBC posted a loss of USD424 million in Europe during the third quarter, compared to a USD634 million profit a year before. In North America, profit dropped 36% to USD299 million. In the Middle East & North Africa, HSBC's profit slipped 5.3% to USD305 million.
This was offset, however, by a positive performance in Asia. HSBC saw profit rise 4.3% in its core market to USD4.65 billion.
"Parts of our business, especially Asia, held up well in a challenging environment in the third quarter," Chief Executive Officer Noel Quinn said. "However, in some parts, performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK, and the US."
In August, Quinn took the helm of HSBC after former CEO John Flint left the role after only a year and a half.
AJ Bell investment director Russ Mould commented: "Just as it is very hard to turn around a super-tanker in midstream, management are finding it very difficult to achieve a change of direction at Europe's biggest bank HSBC."
"Profitability is under pressure, impairments are up, the company has returned to negative 'jaws' or in other words costs are rising higher than income, and the return on equity target for 2020 has been abandoned," Mould continued.
Interactive Investor's Hunter added: "The fourth-quarter outlook from HSBC predicts a torrid time, and this follows any number of underperforming units of the banking behemoth failing to deliver in this period.
"In its own words, areas of continental Europe, the UK and the US provided unacceptable performances and it is clear that these divisions need a radical overhaul. This in turn means that restructuring charges in the final part of the year are likely to hurt and will be in addition to the current fears of a global economic slowdown following on from the US/China trade spat, political turmoil in Hong Kong and general European economic malaise."
Within individual HSBC units, Retail Banking & Wealth Management reported a 17% annual drop in profit to USD1.70 billion. Commercial Banking saw profit fall 11% to USD1.63 billion. Global Banking & Markets recorded a 30% fall in profit to USD1.24 billion.
"The reduction in [group] reported profit before tax reflected lower revenue, primarily as Global Banking & Markets generated less income in Global Markets from reduced client activity due to ongoing economic uncertainty, which compared with a strong third quarter last year," the lender explained.
HSBC continued: "This decrease was partly offset by higher revenue in Commercial Banking, mainly reflecting higher balances in Credit & Lending and Global Liquidity & Cash Management. In Retail Banking & Wealth Management, growth in our Retail Banking business was broadly offset by adverse market impacts on insurance manufacturing. In addition, expected credit losses increased in both Retail Banking & Wealth Management and Commercial Banking."
Return on tangible equity stood at 6.4% in 2019, lower than the 10.9% reported in 2018. The common equity tier one solvency ratio for HSBC in the third quarter of 2019 stood at 14.3%, unchanged on the year prior.
Adam Vettese, an analyst at eToro, said: "Whether it's interim CEO Noel Quinn or not, whoever takes over as the next boss of HSBC has an enormous job on their hands to get the bank back on track.
"Not only will they have to steer the bank against a backdrop of Brexit, the US-China trade war and low rates globally, they will also need to make some tough decisions over the bank's underperforming US and European arms."
"So while some investors will be happy to hear the bank is taking steps to reinvigorate itself, that won't happen overnight and there is a very good chance of some pain ahead first," Vettese added.
HSBC's loan book ended September 30 at USD1.02 trillion, broadly flat compared to three months earlier but up 4.0% from the beginning of 2019. Risk-weighted assets declined 2.3% in the quarter to USD865.2 million from USD886.0 million at June 30.
The lender said: "Customer lending growth was primarily in Asia, reflecting an increase in Global Banking & Markets, due to higher term lending from our continued strategic focus on growth throughout Asia.
"Customer lending increased in Retail Banking & Wealth Management, primarily in Hong Kong, where we maintained a leading position in mortgages. This was partly offset by a decrease in Commercial Banking. In Europe, customer lending increased, primarily reflecting growth in mortgage balances in the UK, due to our focus on broker-originated mortgages. We also increased lending to our corporate clients within HSBC UK mainly through term lending. The remaining increase in Europe primarily reflected growth in the UK in Global Banking & Markets."
The lender's net interest margin at September 30 stood at 1.59%, down from 1.67% at the same point a year earlier.
Adjusted jaws in 2019 fell to negative 2.4% from negative 1.6% the year prior. The jaws ratio - a key financial performance indicator - is the difference between the percentage growth in income and the percentage growth in expenses, so you want jaws to be positive.
The lender's operating expenses rose 2.3% to USD8.15 billion from USD7.97 billion. The increase was attributed to USD388 million additional charges for mis-selling payment protection insurance in the UK and USD140 million in restructuring charges as the lender seeks to implement "cost efficiency measures".
"Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth," Quinn added. "We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities."
Amid these "softer" conditions, HSBC now no longer expects return on equity of at least 11% to be achieved in 2020. The FTSE 100-listed lender will, therefore, focus on rebalancing its capital away from low-return businesses as well as adjust its cost base.
These changes could result in "significant" charges in the fourth quarter of 2019. Such costs would be related to goodwill impairments and additional restructuring charges.
Despite this, HSBC remained committed to a CET1 ratio above 14% and to "sustain" its dividend. For the third quarter, HSBC held its dividend unchanged at 10 US cents per share.
Interactive Investor's Hunter said: "Overall, there are more questions than answers emanating from this update. The continuing historic lows in the interest rate environment globally show no signs of abating, putting pressure on margins and the lack of clarity around a permanent CEO is another hurdle to jump. Meanwhile, HSBC is on a punchy valuation, which will become increasingly difficult to justify given the clear squeeze on the company’s key metrics at present.
"The current performance and the immediate outlook both suggest better value elsewhere, with the market consensus of the shares as a Sell being the unfortunate result."
By Paul McGowan; [email protected]
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