HSBC’s Q3 pre-tax profit up 32 per cent, tops expectations

PUBLISHED : Monday, 02 November, 2015, 12:49pm
UPDATED : Monday, 02 November, 2015, 9:38pm

HSBC Holdings beat forecasts with a 32 per cent year-on-year jump in profits in the third quarter while also taking a US$32 billion bite out of the assets it plans to cut from its global balance sheet.

The bank, Europe’s largest, also announced plans to launch a majority-owned brokerage in China, in what would be a first for a foreign financial institution and a step toward re-investing assets in the Pearl River Delta, although it gave no update on a possible relocation of the bank’s headquarters to Hong Kong.

Pre-tax profits hit US$6.1 billion between July and September, besting analyst expectations that averaged at about US$5.2 billion. Heavy one-off costs dragged on HSBC’s profits during the same period last year to US$4.7 billion.

A slowdown in insurance manufacturing lines under its retail banking and wealth management unit in Hong Kong helped pull down adjusted revenues, which fell 4 per cent year on year to US$14 billion. Low global interest rates, which have plagued HSBC’s investment bank for years, continued to stifle revenues from credit, rates and forex businesses.

Operating costs fell by 6 per cent compared to the quarter before but the bank struggled to raise its growth in income above its growth in expenses. That gap widened for the first nine months of the year, with the ratio falling to -4.1 per cent, up from -2.9 per cent in the first half of the year.

“The cost performance was reasonably pleasing but will probably need to go further given the challenging revenue environment,” Ian Gordon, an analyst at Investec, said from London on Monday.

Investors in Hong Kong and London showed little confidence in the better-than-expected results on Monday. The bank’s shares closed down 1.15 per cent at HK$60.30 while the Hang Seng Index closed down 1.19 per cent. Shares in London were down 1.05 per cent to 502.4 pence at mid-day.

The dividend for the third quarter was 10 pence per share, meeting analysts’ expectations.

HSBC’s latest bid to remake itself from the “world’s local bank” into a slimmer international bank saw more progress in the third quarter than some analysts had counted on.

The centrepiece of that effort was to cut out US$290 billion in risk-weighted assets by the end of 2017, mainly from its investment bank. The bank shed US$32 billion over the three months, bringing the total reduction from the start of the year to about US$82 billion.

The cuts, which are coming out of underperforming businesses in the Americas, put it roughly on track to hit the target within the next two year.

Chief executive officer Stuart Gulliver said during a call with investors that the cuts would not be linear but sought to pare down concerns that the easiest work was done this year.

“Don’t just think that we’ve picked the low-hanging fruit,” he said.

If cutting risk-weighted assets was the easy part, re-investing up to US$150 billion in markets that will generate higher returns might be the real challenge.

So far just US$5 billion had been redeployed, the bank said on Monday.

A large portion of the re-invested assets will land in the Hong Kong, Guangzhou and Shenzhen, where head count could grow despite plans to cut the bank’s global workforce by 50,000, including exits from Brazil and Turkey.

In one of the bigger surprises of the day, the bank’s management said HSBC has entered an agreement with Shenzhen Qianhai Financial Holdings to launch a securities brokerage in Shenzhen in which it would own a majority stake. This would allow the bank to enter into China’s onshore debt capital markets and yuan-bond underwriting, which Gulliver called a “significant opportunity”. The agreement still needed regulatory approval.