HSBC buyback sparks rise in share price, despite 29pc slump in interim profit

Move follows the sale of Brazilian division last year, and CEO says bank could buy back more stock next year after selling US credit card business

PUBLISHED : Wednesday, 03 August, 2016, 12:43pm
UPDATED : Wednesday, 03 August, 2016, 10:54pm

HSBC announced a US$2.5 billion share buyback on Wednesday, its first ever, prompting a rise in its shares in both Hong Kong and London.

Stuart Gulliver, the bank's chief executive, said the move was possible thanks to capital from the sale of its Brazilian business.

The bank also reported a 29 per cent fall in pre-tax profits for the six months to the end of June to US$9.7 billion, down by US$3.9 billion compared with last year.

Gulliver insisted the buyback plan was “not part of a programme” of others, although he did say there was the potential of a further move when the proceeds from the sale of the bank’s US credit card business and upstate New York branches, completed in 2012, are returned to the parent company.

Considering the share buyback’s size, capital benefits from the Brazil sale, reliable profit generation, and moderate risk appetite, this will not have an impact on our rating
Sabine Bauer, senior director financial institutions at Fitch

This year’s buyback is expected to be completed by the end of the year.

Sabine Bauer, senior director financial institutions at ratings agency Fitch, said capital reduction is generally negative for corporate credit ratings.

“But considering the share buyback’s size, capital benefits from the Brazil sale, reliable profit generation, and moderate risk appetite, this will not have an impact on our rating.”

HSBC’s share price rose 1.57 per cent in Hong Kong to close at HK$51.6. In London, at one point the bank’s shares reached £5.02, its highest level since early January.

Louis Tse, director at VC brokerage, said the rise in price was partly because the market was expecting worse figures from the bank, “but also because of the buyback”.

Commenting on the interim results, Bauer said the bank continues to find revenue growth difficult in a number of areas.

The drop in profit and revenue, she added, showed particular underperformance by HSBC’s international network and US activities.

HSBC also said that it would fail to reach its target of a return in equity of 10 per cent by 2017, and that

dividends would remain at 51 cents for the foreseeable future.

Its profits in Asia fell by 23 per cent in comparison with the first half of last year, which it attributed in part to the initial impact of the Shanghai-Hong Kong stock connect not being repeated, and a slowdown on the Hong Kong and Shanghai stock exchanges hitting its wealth management business.

Gulliver said the impact of the UK’s vote to leave the European Union had affected HSBC’s lending to SMEs, but had had little impact on retail banking or loans to larger companies.

He also said the bank had considered the possibility of the UK leaving the EU when it had decided to keep its headquarters in London, and that he remained happy with the decision.

The sale of HSBC’s Brazilian operations to Banco Bradesco, completed on July 1, was part of the bank’s ongoing attempts to cut costs.

Gulliver said the group was on track to reach its target of cutting annual costs by US$5 billion, but that any faster acceleration would be detrimental to revenue.

“My expectation is that we will continue cost cutting into 2018/2019,” said Gulliver.