HSBC posts second-quarter surprise as profit jumps unexpectedly by 61 per cent on deferred tax gain, helping bank to beat estimates

Net profit jumped by 61 per cent to US$5.49 billion in the three months ended June 30, beating the US$2.7 billion expected by analysts
Revenue advanced by 1.6 per cent to US$12.8 billion, while net interest income rose 13.6 per cent to US$7.5 billion during the period, the London-based bank said

Banking & finance

Chad Brayin London

Published: 12:40pm, 1 Aug 2022

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HSBC, the biggest of Hong Kong’s three currency-issuing banks, defended its internationally focused strategy and promised to return its dividend to pre-pandemic levels on Monday as it faces pressure from its largest shareholder to break up the bank.

The bank reported an unexpected 61 per cent jump in net profit to US$5.49 billion in the three months ended June 30, beating the US$2.7 billion expected by analysts. Revenue advanced by 1.6 per cent to US$12.8 billion, while net interest income rose 13.6 per cent to US$7.5 billion during the period, the London-based bank said.

The quarterly results included a US$1.8 billion gain on a deferred tax asset from historical losses, which was accelerated as a result of improved profit forecast in its UK business, HSBC said.

HSBC’s second-quarter surprise came amid rising interest rates and a slumping economy in Hong Kong, where the 157-year-old bank traces its roots to, and where it earns much of its revenue. Its seventh consecutive quarterly earnings growth also offers the bank a buffer as it faces pressure from its biggest shareholder Ping An Insurance Group to spin off its Asian business.

HSBC’s chief executive Noel Quinn speaking during a panel discussion at the Bloomberg New Economy Forum in Beijing on Friday, Nov. 22, 2019. Photo: Bloomberg

“We have no greater strength than our ability to bridge capital and trade flows between the major economic blocks of the world,” HSBC’s chief executive Noel Quinn said during an analysts’ call. “It has been our judgment that alternative structural options will not deliver increased value for shareholders, [but] would rather have a material, negative impact on value. Our current strategy is the fastest and safest way to get to higher returns and dividends we all want to see.”

The market cheered HSBC’s unexpected profit gain and its pledge to restore dividends. HSBC’s shares rose almost 5 per cent to close at HK$51.85 after the second-quarter surprise was announced in Hong Kong, their biggest one-day percentage gain in almost six months, recovering from the pre-result intraday slump of 1.4 per cent.

05:25

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Net interest margin (NIM), an important measure of a bank’s profitability, rose 15 basis points from last year to 1.35 per cent during the period. It was stronger than the 1.26 per cent in the first quarter.

Pre-tax profit in HSBC’s global banking and markets segment jumped by 36.6 per cent to US$1.68 billion during the quarter. The commercial bank’s pre-tax profit rose 10.2 per cent to US$1.72 billion from a year earlier.

Growth in the bank’s wealth and personal banking segments slowed, with pre-tax profit dipping by 1.7 per cent to US$1.77 billion.

Hong Kong – the “H” in HSBC’s name and the bank’s biggest market – also took a hit, with pre-tax profit falling 16 per cent to US$1.47 billion due to a slower-than-expected recovery from the city’s Covid-19 outbreak. Across Asia, HSBC’s pre-tax profit rose by 9.7 per cent to US$3.49 billion.

Hong Kong fell into recession after the city’s economy contracted by 1.4 per cent in the second quarter, as the social-distancing rules and travel restrictions enacted to combat a protracted Covid-19 outbreak crimped consumption and the city’s services sector.

(L-R): Norman Chan Tak-lam, former Chief Executive of Hong Kong Monetary Authority (HKMA); Diana Cesar, then the Hong Kong chief executive of The Hong Kong Shanghai Banking Corporation Limited; Mary Huen Wai-yi, Executive Director and Chief Executive Officer, Hong Kong, Standard Chartered Bank; and Gao Yingxin, Vice Chairman and Chief Executive, Bank of China (Hong Kong) Limited, at a forum to the introduce the 2018 series of HK$100 bank notes at the Xiqu Centre in West Kowloon Cultural District on 2 September 2019. Photo: K.Y. Cheng

Hong Kong’s economic slowdown was also felt at Hang Seng Bank, HSBC’s 62.1 per cent unit and one of the city’s biggest lenders, which reported a 46 per cent drop in first-half net profit to HK$4.7 billion (US$599 million).

The decline resulted from a significant drop in insurance income due to the market rout amid interest rate rises in the first half, while mainland China’s real estate debts also led the bank to increase its expected credit losses, said Hang Seng’s chief executive officer Diana Cesar, in a statement.

“There is no denying that the first half has been particularly difficult,” she said. “The fifth wave of the pandemic continued to disrupt trade and business activities.”

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Global geopolitical tensions also created challenges for all businesses, she said. “These have inevitably impacted financial performances,” Cesar said.

HSBC’s results followed crosstown rival Standard Chartered, which reported a 18 per cent increase in its profit last week, driven by gains in its transaction banking and financial markets businesses.

HSBC said it would take an additional US$142 million in credit impairments for potential soured loans in its Chinese commercial real estate portfolio amid growing concerns about China’s economic slowdown and continued financial pressure on the property sector, a major driver of the mainland economy.

Standard Chartered and HSBC each took US$160 million of credit impairments for potential soured loans related to their mainland commercial real estate books in the first quarter. Standard Chartered took US$77 million in additional provisions in the second quarter.

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HSBC has just under US$20 billion in exposure to the China commercial real estate market, with about US$12 billion in its offshore loan portfolio, said the bank’s chief financial officer Ewen Stevenson. The bank has taken about US$1 billion in provisions related to the offshore portfolio, Stevenson said.

“We’re some ways away from saying we’re through the troubles of Chinese commercial real estate market. I think we should expect further provisions in the second half. I think the policy actions the Chinese government is taking are clearly helpful,” he said during a conference call. “Globally, it’s the portfolio we’re paying the most attention to at the moment. We’re managing it and hopefully conditions will improve in the second half.”

HSBC said it would pay an interim dividend of 9 US cents a share, and begin paying dividends quarterly again in 2023. Analysts expect the bank to pay a dividend of 28 US cents a share for full-year 2021, according to market consensus.

Ping An’s push to split HSBC fails to resonate with bank’s investors

A better-than-expected second quarter and the restoration of dividends following a shock suspension in 2020 could undergird HSBC’s pushback against Ping An’s push since March to break up one of the world’s largest banks.

Ping An wants HSBC’s top management to unlock more value for investors as the company’s stock has been battered in recent years by geopolitical concerns, economic uncertainty over the coronavirus pandemic and a decision to suspend its dividend in 2020 at the request of its chief regulator in Britain. Ping An’s campaign has so far failed to gain public support from other major shareholders.

HSBC is hosting an informal meeting of shareholders in Hong Kong on Tuesday, where several smaller shareholders are expected to advocate for an Asian spin-off.

Additional reporting by Enoch Yiu