HSBC, Standard Chartered dividends in focus as banks seen delivering stronger half-year results

HSBC, Standard Chartered resumed paying dividends this year after suspending payouts in 2020 to preserve capital during the pandemic
Prudential Regulation Authority in July discarded ‘temporary guardrails’ put in place after banks resumed dividend payouts

Banking & finance

Chad Bray

Published: 12:30pm, 1 Aug, 2021

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Investors will be watching this week to see whether HSBC and Standard Chartered resume paying interim dividends as the lenders prepare to report their first-half results against the backdrop of a sharp economic recovery in Hong Kong, their single biggest market.

HSBC will be the first of the city’s three currency-issuing banks to update investors on its half-year performance on Monday, followed by Standard Chartered on Tuesday and Bank of China (Hong Kong) later this month.

Other big banks with operations in the city that are expected to report their results this week include Hang Seng Bank, which is majority owned by HSBC; Singapore’s DBS Group Holdings[ and Oversea-Chinese Banking Corp, the parent of OCBC Wing Hang.

Hopes for a payout have increased as some of HSBC’s and Standard Chartered’s UK peers announced plans for interim dividends and share buy-backs last week. The Prudential Regulation Authority (PRA), an arm of the Bank of England, last month removed a series of “temporary guardrails” that constrained the amount they could distribute to shareholders when they resumed dividends this year.

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“Their dividend restrictions have been lifted by BoE, paving the way for an interim dividend,” Citi analyst Yafei Tian said in a research note. “Domestic HK banks [also] could be allowed to increase dividend payout ratios given robust asset quality and strong capital.”

HSBC and Standard Chartered are both based in London, but generate much of their revenue in Asia.

Last year, HSBC and Standard Chartered halted their dividends and share buy-backs following a request by the PRA to make sure banks had enough capital on hand to help fund the economy in light of the coronavirus pandemic. The suspension sparked a rebellion by shareholders in Hong Kong, many of whom rely on the regular payouts.

When banks were allowed to resume payouts, the regulator said that distributions to shareholders should not exceed 20 basis points of risk-weighted assets at the end of the year or 25 per cent of cumulative profits for all of 2019 and 2020, after deducting prior shareholder payouts. It reminded lenders to exercise “an appropriate degree of caution” around the payouts.

Commuters walk outside HSBC’s main building in Central. HSBC kicks off earnings season for Hong Kong’s biggest banks when it reports its first-half results on Monday. Photo: Bloomberg

On Wednesday, British rival Barclays said it would pay an interim dividend of 2 pence a share and undertake a £500 million (US$694 million) stock buy-back programme. Lloyds Banking Group and NatWest Group also announced that they would resume paying interim dividends.

Standard Chartered is expected to pay a full-year dividend of 19.5 US cents a share for 2021 after making a payout of 9 US cents a share for full-year 2020 in May, according to a consensus estimate of 15 analysts compiled by the bank.

HSBC is expected to pay a full-year dividend of 23 US cents a share for 2021, according to market consensus, after making a payout of 15 cents a share for full-year 2020. The bank previously said it would target a payout ratio of 40 per cent to 55 per cent of reported earnings from 2022 onwards.

At the same time, lenders in the city are navigating a period of historically low interest rates as central banks try to restart economies whacked by the coronavirus pandemic.

Standard Chartered chief executive Bill Winters. Photo: Xiaomei Chen

Lower rates have cut into net interest margins at lenders, forcing many to put focus more on fee-generating products. Both HSBC and Standard Chartered are bolstering their wealth management businesses to take advantage of rising incomes in the Greater Bay Area and other parts of Asia.

In June, the US Federal Reserve moved forward its timeline for rate hikes, saying they could come as soon as 2023. Rising inflationary pressure also has prompted some investors to fret that the Fed and other central banks could bring forward rate increases sooner than that projection.

Consumer prices rose 0.7 per cent in Hong Kong in June, the sixth consecutive monthly increase this year, according to the latest government figures. Hong Kong’s economy suffered its worst contraction on record in 2020, but grew by 7.9 per cent in the first quarter, its fastest pace in more than a decade.

HSBC’s second-quarter pre-tax profit is expected to more than double to US$2.86 billion, including US$552 million in expected credit losses, according to a consensus estimate compiled by the bank. That compared with US$1.09 billion in the prior year period when it increased its expected credit losses for the first half of the year to US$6.86 billion.

Apart from the dividend news, another area investors will be monitoring is whether banks in Hong Kong are able to release additional billions of dollars of credit reserves set aside last year for potential soured loans as the pandemic raged.

Results at American rivals JPMorgan Chase, Citigroup and Bank of America were all bolstered in the second quarter by reserve releases as the US economy improved.

Standard Chartered is expected to report a second-quarter pre-tax profit of US$816 million, with US$218 million in credit impairments, according to a consensus compiled by the bank. In the same quarter last year, the bank incurred a pre-tax loss of US$192 million after its provisions for such impairments rose by an extra US$611 million.

An increase in credit losses at Hong Kong banks in 2020 was “manageable in a global context” thanks to tight underwriting standards and fiscal support to businesses and households by the city’s government, according to S&P Global Ratings. The unwinding of those support measures should not lead to significant asset quality problems for the city’s banks, the rating agency found.

“We expect the Hong Kong economy to sharply rebound supported by policy initiatives, strong economic growth in China, and pickup in global trade,” S&P credit analyst Shinoy Varghese said in a research note. “The banking sector’s credit losses should therefore decline over the next two years and could potentially reach pre-Covid levels earlier than the end of 2022.”

This article appeared in the South China Morning Post print edition as: Investors focus on dividends in banks’ first-half earnings

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