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HSBC’s iconic lion sculptures, known as Stephen and Stitt (above), returned to public view at HSBC”s main building in Hong Kong last week after being under wraps for more than nine months in what has been a challenging period for the bank. Photo: Felix Wong
BusinessBanking & Finance

HSBC eyes restarting dividend as third-quarter profit beats estimates on strength of Asian business, slower loan losses

  • HSBC cancelled its final dividend for 2019 and suspended payments this year at request of UK regulator
  • Pre-tax profit was US$3.07 billion, above a consensus estimate of US$2.07 billion
HSBC
Chad Bray
Chad Bray
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HSBC, the biggest of Hong Kong’s currency-issuing banks, said on Tuesday it may pay a “conservative” dividend for the full-year 2020 after it reported a better-than-expected third-quarter profit as it benefited from a resilient performance from its Asian operations and set aside less money for soured loans.

The bank’s top executives said they were encouraged by its performance so far this year and the improving economic outlook into 2021, but would reassess based on economic conditions in early 2021 and discussions with its regulators before restarting payouts to investors.

“We are more optimistic than when we last spoke,” Noel Quinn, the HSBC chief executive, said on a call with analysts on Tuesday. “Economic forecasts are looking brighter, particularly in Asia. As you can see from our Q3 results, expected credit losses have stabilised.”
In April, the bank, Europe’s biggest by assets, cancelled its final dividend for 2019 and suspended dividend payments this year at the request of its chief regulator in the United Kingdom, sparking a rebellion among its Hong Kong shareholder base .

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The news sent HSBC shares in Hong Kong to their highest level since late August.

HSBC shares lost more than 44 per cent of their value this year following the cancellation of its dividend and growing concerns among investors about how deteriorating relations between Washington and Beijing could weigh on the bank’s bottom line. The bank’s shares closed 4.8 per cent higher at HK$33.80 in Hong Kong on Tuesday.
The bank, which is based in London but generates much of its profit in Asia, said it now expects to take provisions for potential soured loans at the “lower-end” of a range of US$8 billion to US$13 billion that it forecast in August.
In the first nine months of the year, HSBC recorded US$7.6 billion in so-called expected credit losses because of weakening business activity from the coronavirus pandemic, nearly four times what it set aside a year ago.

New accounting standards adopted by HSBC and its rivals in 2018 require banks to recognise potential credit losses over the life of a loan and more aggressively write down loans if they have experienced a significant increase in credit risk.

On Tuesday, HSBC also said it now expected to reduce its annual costs to below US$31 billion by 2022, a more ambitious target as the company seeks to eliminate 35,000 jobs as part of a massive restructuring. The bank said its headcount, including contractors, is expected to decline by about 10,000 positions this year.

Ewen Stevenson, HSBC’s chief financial officer, said in an interview with Bloomberg Television that the bank is considering ways to digitise more of its operations and have more employees work from home in the future following the bank’s experience during the pandemic.

“I’d like to think the balance we could get to is two or three days at home, two or three days at the office,” Stevenson said in an interview on Bloomberg Television.

HSBC reported a pre-tax profit of US$3.07 billion, above a consensus estimate of US$2.07 billion by analysts polled by the bank. That compared with a pre-tax profit of US$4.84 billion a year earlier.

On a net basis, the bank reported a third-quarter profit of US$1.36 billion, compared with US$2.97 billion a year ago. Revenue declined 7 per cent to US$15.9 billion in the third quarter, while net interest income fell 14.8 per cent to US$6.45 billion.

“Things to watch remain the interplay of unsecured retail and commercial exposures, vis-à-vis somewhat diminished fiscal support into mid-2021, and Brexit into the year-end,” Nick Lord, a Morgan Stanley analyst, said in a research report on Tuesday.

Despite its optimistic outlook, the bank warned on Tuesday that it could still face headwinds from historically low-interest rates; uncertainty surrounding a resurgence of coronavirus cases globally; the ongoing exit of Britain from the European Union; and continued geopolitical tensions between Washington and Beijing ahead of the US elections next week.

HSBC expects to cut its annual costs to below its original target of US$31 billion by 2022. Photo: Nora Tam
HSBC drew the ire of US and UK politicians over its public support of a controversial national security law that Beijing adopted for Hong Kong after months of anti-government protests in the city.
It also faced heavy criticism from mainland media after it provided information to US prosecutors as part of an investigation into Chinese telecommunications firm Huawei Technologies, with at least one outlet suggesting it could be added to an “unreliable entities” list being drafted by Beijing.
In a Twitter post last week, Liu Xiaoming, China’s ambassador to the United Kingdom, pointed to HSBC as an example of how China is opening up its markets to foreign businesses. Some in the mainland see the post as an example of the rhetoric about HSBC cooling down.

“It’s our ambition to continue to be a long-term investor in China,” Quinn said on a conference call with journalists. “We believe we have an important role to play in the opening up of China and helping China develop its international markets.”

One question for banks next year is how quickly economies can recover from the pandemic-induced downturn, particularly as government support measures ebb.

Parts of the United Kingdom, the bank’s second-biggest market after Hong Kong, and continental Europe have reinstated lockdowns and have added new social-distancing rules in recent weeks following a surge in cases of Covid-19, the disease caused by the coronavirus. Britain reported 20,890 new cases on Monday, its fifth-highest daily amount since the pandemic began.

The Bank of England also recently asked UK lenders to outline their operational readiness for a zero or negative bank rate, which could further weigh on their bottom lines. The central bank, which has not committed to negative rates, has set its base rate at 0.1 per cent.
The United Kingdom, HSBC’s second biggest market after Hong Kong, is seeing a resurgence in coronavirus cases this month. Photo: AFP

HSBC’s UK ring-fenced bank, which covers its retail banking operations in Britain, reported a pre-tax profit of US$607 million, compared with a pre-tax profit of US$624 million a year earlier. Its non-ring-fenced business in the UK reported a profit of US$391 million, compared with a pre-tax loss of US$17 million a year ago.

The bank’s Hong Kong business – and much of its Asian franchise – have proven to be more resilient, but concerns remain about a potential fourth wave of infections and the pace of the recovery in Hong Kong. The city’s economy is expected to contract by 6 per cent to 8 per cent this year, according to the latest government estimates.

Pre-tax profit in its Hong Kong business declined 37 per cent to US$1.92 billion in the third quarter, compared with a pre-tax profit of US$3.05 billion a year ago. Overall, its Asian business reported a pre-tax profit of US$3.22 billion in the third quarter, compared with US$4.7 billion a year earlier.

HSBC is the first of the city’s currency-issuing lenders to report its quarterly results this week, with Standard Chartered expected on Thursday and Bank of China (Hong Kong) on Friday.
HSBC said its business in Hong Kong and other parts of Asia have been resilient despite interest rate headwinds. Photo: Jonathan Wong

One bright spot for HSBC and many of its global rivals has been a favourable trading environment, which boosted revenue in its global markets business by 16 per cent. The global banking and markets business overall reported pre-tax profit declined 18.3 per cent to US$998 million in the quarter.

Banks have previously warned their trading results may not be sustainable over time and are increasingly expressing concern over the “lower-for-longer” interest rate environment.

The US Federal Reserve indicated in September that interest rates will remain close to zero through at least 2023, with some analysts predicting rates might not rise in the US until 2025 at the earliest. That could weigh on the city’s lenders as Hong Kong’s rates are closely tied to US moves.

“The revenue impact of lower-for-longer interest rates is going to continue over coming quarters as the impact of interest rate cuts unwinds through [our profit and loss statement],” Quinn said. “In response, we’re accelerating all areas of our strategy, with a particular focus on boosting sustainable non-interest income and going further on costs.”

This article appeared in the South China Morning Post print edition as: HSBC may restart dividend as profit exceeds estimates
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