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Hong Kong company reporting season

HSBC reports 6 per cent bump in second-quarter profits as it launches new strategy to boost profitability

Lender says strong start in first half of the year reflects higher deposits and balances in its retail banking and wealth management business and growth in its commercial banking business, particularly in Hong Kong

PUBLISHED : Monday, 06 August, 2018, 12:52pm
UPDATED : Monday, 06 August, 2018, 10:59pm

HSBC said on Monday that its earnings in the second quarter rose 6 per cent as Chief Executive John Flint begins to implement his strategy to reinvigorate the lender.

Europe’s largest bank reported a profit of US$4.09 billion in the second quarter, compared with a profit of US$3.87 billion in the same period last year.

On a pre-tax, adjusted basis, the lender said its profit was US$6.1 billion in the second quarter. That was ahead of an average estimate of analysts surveyed by HSBC.

HSBC’s shares closed up slightly at HK$72.65 in trading in Hong Kong on Monday, but were down in trading in London following the announcement.

“In June this year, I announced eight strategic priorities for the bank between now and 2020. These have two aims – to get HSBC back to growth and to create value,” Flint said in a statement.

“We will seek to achieve these aims by increasing returns from the group’s areas of strength, particularly in Asia and across our network; turning around low-return businesses of high strategic importance, particularly in the United States; investing in building a bank for the future with the customer at its centre; and making it easier for our colleagues to do their jobs,” he said.

Flint took over the leadership of HSBC in February, following a tumultuous period that saw the bank dramatically reshape itself as it faced greater regulatory scrutiny, a difficult economic environment and scandal following the global financial crisis.

Like much of the industry, HSBC has had to shed jobs, exit dozens of businesses and spend tens of millions of dollars to improve its regulatory structure. Banks have struggled against this environment to improve their profitability.

For Flint, the challenge is to drive the pared-down lender, which has pivoted to Asia, to greater profitability and growth.

“We’ve got a clear plan to improve the performance of the HSBC and the market will respond,” Flint said on a call with reporters on Monday when asked about the bank’s recent share price performance.

The bank’s stock is down about 15 per cent this year in Hong Kong from its January highs.

HSBC is one of three lenders that issue bank notes in Hong Kong. It employs more than 228,000 people in 67 countries worldwide and its shares are widely held by retail investors in Hong Kong.

HSBC spends US$2.3b on digital platforms, AI and new technology to reach tech savvy customers

Also on Monday, HSBC subsidiary Hang Seng Bank beat soundly beat expectations for the first half of the year, rising 29 per cent.

Hang Seng Bank beats expectations to report 29 per cent increase in interim profit

HSBC said that it had agreed to resolve an investigation by the US Department of Justice into its underwriting and sales of securities backed by residential mortgages before the financial crisis.

The Justice Department has reached agreements with several banks over their sale of the securities backed by toxic mortgages, including Deutsche Bank and Credit Suisse. Barclays agreed to pay US$2 billion earlier this year to settle an inquiry into its sales of the mortgage securities after the Justice Department sued the British bank in December 2016.

On Monday, HSBC that it agreed in July to pay US$765 million as part of a settlement-in-principle to resolve civil claims by the Justice Department. The settlement is subject to negotiation between the parties and there can be “no assurance” that the parties will reach a final agreement, HSBC said.

The bank, which is based in London but generates more than half of its revenue in Asia, reported a profit of US$8.4 billion in the first six months of 2018. That compared with a profit of US$8 billion in the first half of last year.

Its first-half results were driven by higher deposits and balances in its retail banking and wealth management business and growth in its commercial banking business, particularly in Hong Kong, the bank said.

Expenses rose 7 per cent in the first half of the year as the lender invested in technology and its pivot to Asia. The company plans to spend US$15 billion to US$17 billion in new investment by 2020.

“It is important to invest in the future of the group,” Flint said.

He noted that higher expenses included technology improvements and investments in the bank’s HSBC Qianhai Securities Limited joint venture in China.

HSBC said that it would pay a second interim dividend of 10 cents a share for the year in September.

Revenue increased 5 per cent to US$13.3 billion in the second quarter. That compared with revenue of US$12.7 billion in the second quarter of 2017.

Net interest income rose 9 per cent to US$7.64 billion in the quarter.

In its retail banking and wealth management segment, profit before tax rose 9 per cent to US$1.72 billion in the second quarter.

Pre-tax profit jumped 24 per cent top US$2.04 billion in the lender’s commercial banking business in the quarter, while profit before tax rose 9 per cent to US$1.96 billion in its global banking and markets business in the second quarter.

On a conference call with the journalists, Flint said that the bank had not yet seen any impact from heightened trade tensions between the US and China on the bank’s performance or its clients.

“If there is a full-blown trade war, could that impact our business? Of course,” Flint said. “We recognise the potential threat, but have not seen it yet manifest in our business. How much of the rhetoric turns into reality? I don’t know.”

The lender also said that its board had appointed Jonathan Symonds as its deputy group chairman. Symonds, who has been an independent director on the bank’s board since 2014, is the former chief financial officer of the pharmaceutical companies Novartis AG and AstraZeneca plc and a former Goldman Sachs partner.

Flint, who has spent his entire career at HSBC, replaced Stuart Gulliver, the bank’s long-time chief executive, who retired in February.

He is part of a reshaped leadership team that includes Mark Tucker, the former chief executive of the life insurer AIA Group. Tucker joined the bank last year as the first outsider to serve as its chairman.

Gulliver, who had been CEO since 2011, steered the bank through a difficult period of change following the financial crisis. The lender sold several businesses, cut thousands of jobs and shrunk its global investment bank.

The bank, which was founded in Hong Kong in 1865, also toyed with moving its headquarters from London two years ago, but ultimately decided to keep its base in Britain.

Late last year, HSBC emerged from a deferred prosecution agreement with US authorities, in which it agreed to pay US$1.9 billion in 2012 to resolve accusations that it had facilitated transactions by Mexican drug lords and others facing US sanctions. The scandal damaged HSBC’s reputation and caused it to undergo an extensive overhaul of its financial-crime compliance.

Flint has been tasked with improving profitability at the reshaped bank, saying earlier this year that he wanted HSBC “to get back into growth mode.”

In June, Flint said that the bank would invest up to US$17 billion to expand its operations in Hong Kong, the Pearl River Delta in China and its wealth management business in Asia, as well as to improve its technology.

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