HSBC to sell Brazil unit for US$5.2 billion, H1 profits climb 10 per cent

PUBLISHED : Monday, 03 August, 2015, 12:46pm
UPDATED : Monday, 03 August, 2015, 6:18pm

HSBC Holdings posted strong earnings for the first half of the year on Monday while also disclosing an agreement to sell its entire business in Brazil to Banco Bradesco for US$5.2 billion.

Pre-tax profits at HSBC grew by about 10 per cent year on year to US$13.6 billion in the first half of 2015, coming in above expectations. Operating expenses climbed to US$19.2 billion, an increase of about 5 per cent from the same period last year. The bank also booked US$1.14 billion in legal fees.

The deal in Brazil, struck on Friday, was a positive signal from the bank at a time when management is striving to demonstrate quick work on a major restructuring plan launched in June.

Analysts noted in June that the latest plan from chief executive Stuart Gulliver, which included cutting about 50,000 jobs and lightening the balance sheet by US$290 billion in risk-weighted assets, could prove too similar to a reform he initiated in 2011.

In a statement in HSBC’s earnings report, Gulliver stressed the progress he was making toward seeing the strategy through, including the reduction of US$50 billion in risk-weighted assets.

“We are executing these plans and have significant momentum moving into the second half of the year,” Gulliver said in a statement. Management was scheduled to do a press briefing late on Monday from Hong Kong.

HSBC’s share price in Hong Kong closed up 1.94 per cent in afternoon trading at HK$71.05.

Watch: HSBC profits boom on the back of Asian growth

The sale to Bradesco, the fourth largest bank in Brazil, was widely expected, with some reports late last month suggesting an imminent announcement. But the value of the deal, at about 1.8 times price to book, was far higher than the US$3.75 billion originally reported by international media.

The unit in South America’s biggest economy was the first of two major disposals expected this year in underperforming markets. The Brazilian business posted pre-tax losses of 247 million pounds in 2014.

The next to go will be HSBC’s unit in Turkey, which reported a pre-tax loss of 152 million pounds last year.

Media reports have said HSBC was in talks with Industrial and Commercial Bank of China on the sales of its retail business there, which has accounted for the majority of the pain starting in 2012. Dutch bank ING was another contender, according to media reports, but for the whole operation in Turkey.

No update on Turkey was provided in Monday’s statement

The progress on profitability in the first half of 2015 was another step forward for the bank that just months earlier posted a 17 per cent drop in full-year profits for 2014.

The reported pre-tax profit for the second quarter of the year hit US$6.6 billion, about 17 per cent higher than a Bloomberg consensus.

As expected, Hong Kong was the strongest regional driver for pre-tax profits, bringing in US$3.5 billion in the second quarter, or about 53 per cent of all pre-tax profits.

Hong Kong’s performance was boosted by a US$1 billion selldown of Hang Seng Bank’s share in China’s Industrial Bank announced earlier this year.

Profitability in Hong Kong came at a sharp contrast to other regions, where growth stagnated or fell year on year. In North America, pre-tax profits tumbled 43 per cent in second quarter compared to the same time last year, well below expectations. In the Middle East and North Africa, profits fell by 9 per cent.

By division, the investment banking arm accounted for US$2.5 billion in the second quarter, or a 20 per cent increase year on year.

The bank offered more colour on its plan to redeploy assets in faster-growing markets. Of the US$50 billion in risk-weighted assets reduced on its global balance sheet, US$30 billion have been re-invested.

Although the bank stressed a pivot to Asia in June, Gulliver’s said in the statement on Monday that only about half of the assets it plans to redeploy will end up in the region, while the rest will go to the Middle East and North Africa, North America and Mexico. Capital that could not be re-invested with a return on equity above 10 per cent would be returned to shareholders, according to the statement.

Other than mentioning that a review of its headquarters in London was ongoing, the bank gave no new information on a possible departure from that tax domicile.

After paying out US$1.1 billion in a bank levy in Britain in 2014, it announced that it would review its headquarters, leading many to believed that, along with its own pivot to Asia, that it may return to Hong Kong, where it was founded 150 years ago. The latest government budget has lightened the levy that HSBC and other banks based in Britain were expected to pay this year.