Hong Kong company reporting season

Another share buyback and a 5pc half yearly rise in profit drive HSBC shares higher

Third share buyback in a year underlines progress; lender reports H1 pre-tax profits of US$10.2b compared with US$9.7b for the same period in 2016

PUBLISHED : Monday, 31 July, 2017, 12:54pm
UPDATED : Monday, 31 July, 2017, 11:00pm

HSBC’s share price rose 2.6 per cent in Hong Kong on Monday after a third share buyback in a year by underlined progress in its turnaround plan, with profit also growing by 5 per cent in the first half of 2017, with a further share buyback of US$2 billion.

The latest buyback will take the total of HSBC share buybacks since the second half of 2016 to US$5.5 billion. HSBC’s dividends totaled US$10.1 billion in 2016, $10 billion in 2015 and US$9.6 billion in 2014.

The lender reported pre-tax profits of US$10.2 billion compared to US$9.7 billion for the same period in 2016.

In the second quarter alone, HSBC saw its net profit climb to US$5.3 billion from $3.6 billion a year earlier, beating the $4.6 billion average estimate of five analysts compiled by Bloomberg.

“The beat was almost across the board,” said Morgan Stanley analysts, which has an overweight rating on the stock. They noted that the better performance extended to include HSBC’s global banking and markets division, its retail banking and wealth management division, and its corporate centre.

HSBC also managed to build its capital position further, which the Morgan Stanley analysts attributed that to “strong earnings progression”.

On calls to analysts and the media, HSBC senior management were careful to downplay the suggestion that this indicated there would a sustained programme of buybacks, but there was nonetheless a change in the narrative.

The previous two buybacks were linked directly to capital that HSBC had allocated to its Brazil business. Following the sale of that business, the capital was no longer required, and so the bank used that cash to fund the first two buybacks.

This latest buyback was not linked to any particular development, and speaking to analysts, Stuart Gulliver, HSBC’s group chief executive said it would now be part of the bank’s “normal toolkit’ when managing its capital position.

Since the first buyback announced with HSBC’s interim results on August 3, 2016, the bank’s share price has risen sharply, up 52 per cent.

“HSBC indicated it carried out another buyback rather than increase the ordinary dividend as the latter might lead investors to expect higher dividends in future,” said Laith Khalaf, senior analyst at Hargreaves Lansdown in London.

“However, if you have regular share buybacks the market might come to expect that these will continue. After three buybacks, I think we are now approaching that situation.”

Gulliver said that before launching any buybacks, HSBC would first look to invest excess capital in the business, to ensure the dividend was supported at its current level of 51 cents, and maintain a comfortable buffer to deal with any unforeseen circumstances.

Hong Kong played its part in HSBC’s strong performance. Total loan growth in Hong Kong was up 19 per cent across both retail and corporate banking year on year, for the first half of 2017, and HSBC said in its report that it also had gained market share in trade financing.

HSBC management also flagged developments in mainland China, including the launch of its new securities brokerage in Qianhai. However, Gulliver said the new venture was not expected to provide any significant revenues for the bank in the near future.

HSBC’s current senior management team is reaching the end of its tenure. Current group Chairman Douglas Flint will be replaced in October by Mark Tucker, the former chief executive of insurer AIA.

Today, Gulliver was asked whether the bank’s performance might tempt him to stay on beyond next year, but he reiterated his plans to step down in 2018.

Flint said the bank was considering both internal and external candidates.

In its other home market, the UK, HSBC Group Finance Director Iain McKay said HSBC had spent approximately US$500 million on the setting up of a ring-fenced retail bank, as required by regulators, and would also face costs over Brexit, though these would be significantly lower than that of the setting up of the ring-fenced bank.

Since the first buy back was announced on August 3, 2016, HSBC’s share price in Hong Kong has risen by 40.2 per cent.