HSBC restores interim dividend as better-than-expected second-quarter profit soars on reserve releases

Hong Kong’s biggest currency-issuing bank said it would pay out an interim dividend of 7 US cents a share
Pre-tax profit was US$5.06 billion, beating a consensus estimate of US$3.67 billion

HSBC

Chad Bray

Published: 12:11pm, 2 Aug 2021

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HSBC , the biggest of the city’s three currency-issuing banks, said it would restore its interim dividend to shareholders as it reported better-than-expected second-quarter profit on releases of reserves for soured loans and lower operating expenses.

The Prudential Regulation Authority, an arm of the Bank of England, removed “temporary guardrails” last month that limited the amount HSBC and other United Kingdom-based lenders could distribute to shareholders after they resumed paying dividends for the 2020 financial year. HSBC is based in London, but generates most of its profit in Asia.

The bank, one of Europe’s biggest by assets, said it would pay an interim dividend of 7 US cents a share, but would not consider reinstating quarterly dividends before 2022. Analysts expect the bank to pay a dividend of 23 US cents a share for full-year 2021, according to market consensus.

“These are good results that reflect the return of growth in our main markets and marked progress in the execution of our strategy,” Noel Quinn, the bank’s CEO, said in a statement. “We were profitable in every region in the first half of the year, supported by the release of expected credit loss provisions. Our lending pipeline began to translate into business growth in the second quarter and we further strengthened that pipeline during the half. ”

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In the second quarter, the lender’s pre-tax profit was US$5.06 billion, beating a consensus estimate of US$3.67 billion by analysts compiled by the bank, and a significant improvement over the US$1.09 billion it reported a year earlier. On a net basis, HSBC earned a profit of US$3.4 billion in the second quarter, compared with a profit of US$192 million a year ago.

Shares of HSBC rose about 1 per cent to close at HK$43.45 in Hong Kong on Monday.

In the first half, the bank released US$719 million in reserves set aside for soured loans, including US$435 million in the first quarter. HSBC earmarked US$8.8 billion in provisions for expected credit losses for all of 2020 as the coronavirus pandemic weighed on economic activity globally.

A man in a face mask passes through the HSBC headquarters in Central. Photo: Sam Tsang

The bank said that it expects its charges for soured loans to be “materially lower” than its medium-term range of 30 to 40 basis points of average loans and there could be an additional release of reserves later this year. The bank also said it would consider potential share buy-backs in the second half of the year.

Revenue declined 4 per cent to US$12.6 billion in the second quarter, while net interest income fell 4.6 per cent to US$6.58 billion.

Net interest margin, an important measure of profitability, slipped 13 basis points to 1.2 per cent from 1.33 per cent in last year’s second quarter. It was 1.21 per cent in the first quarter.

HSBC and its banking rivals are dealing with a period of historically low interest rates, which have eaten into their profits and caused the lender to put greater focus on wealth and fee-generating products.

Against the backdrop of historically low interest rates, the bank reported a nearly 21 per cent decline in its second-quarter pre-tax profit in Hong Kong. Overall, the bank’s Asian business reported a pre-tax profit decline of 12.4 per cent to US$3.18 billion.

Hang Seng Bank, a 62.1 per cent subsidiary of HSBC and a major retail bank in Hong Kong, said its half-year net profit dropped 4 per cent to HK$8.77 billion (US$1.13 billion). Despite reporting a lower profit, the bank increased its first half-year dividend to HK$2.20 per share, compared with HK$1.90 last year.

Irene Lee Yun-lien, the first woman to serve as Hang Seng’s chairwoman, blamed the profit fall on lower interest rates, with net interest income declining 20 per cent year on year in the first half.

Consensus estimates for HSBC’s full-year results could be revised upwards by 20 per cent or more on the back of lowered guidance for provisions, but future years are likely to be largely unchanged, Citi analyst Yafei Tian said in a research note.

At the same time, global banks operating in Hong Kong could find themselves in the crosshairs as China’s top legislative body is expected to insert a tough new anti-sanctions law in the city’s mini-constitution later this month.

HSBC is prepared to address any conflicts created by US-imposed sanctions and China’s new legislation, which gives legal grounds for Beijing to take countermeasures against foreign “discriminatory restrictive measures” that “violate international laws and basic norms”, Quinn said.

“It’s complex, we’re navigating it and we’ll continue to navigate that going forward,” Quinn said on a conference call with reporters.

Pre-tax profit in the bank’s global banking and markets segment jumped 42 per cent to US$1.23 billion in the second quarter. In HSBC’s wealth and personal banking segment, pre-tax profit more than doubled to US$1.8 billion in the three months ended June 30.

The commercial bank reported a pre-tax profit of US$1.6 billion in the quarter, compared with a loss of US$582 million in the prior-year period.

The results come as HSBC continues to revamp its business and place an even greater focus on Asia, its largest revenue-generating region.

Stitt, one of HSBC’s iconic lion sculptures, stands guard outside the bank’s main building in Hong Kong. Photo: Sam Tsang

Quinn said the bank is hiring 100 more wealth planners than initially planned this year, reflecting an accelerated roll-out of its HSBC Pinnacle business in the mainland. It also is looking at three to four potential “small bolt-on acquisitions” for its wealth business in Asia.

At the same time, it cut 3,500 positions globally in the first half as it shifts capital from underperforming businesses in the US and Europe.

The lender agreed in May to sell most of its US branches to Citizens Financial Group and California’s Cathay Bank as it prepares to exit its American mass-market retail business and separately agreed in June to sell its French retail business to My Money Group. The US transaction is expected to close in 2022, while the French transaction is expected to close in 2023. It will take a hit of more than US$2 billion on the sales.

“Our US and European businesses are much better positioned to grow than at the start of the year,” Quinn said on a call with analysts.

Additional reporting by Enoch Yiu

This article appeared in the South China Morning Post print edition as: HSBC restores interim dividend as profit rises