HSBC to quicken cost cuts after third-quarter profit trails estimates on weaker retail banking, global markets

Net profit drops by 24 per cent, the most since the final quarter 2016, while income on pre-tax basis comes below analysts’ estimates
Retail banking and global markets business post double-digit profit drops in third quarter

HSBC

Chad Bray

Published: 12:07pm, 28 Oct 2019

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HSBC, one of three lenders authorised to issue currency in Hong Kong, said it would accelerate efforts to cut costs and remodel its business after profit slumped more than analysts estimated last quarter because of weaker results in retail banking and global markets operations.

Net profit at the London-based banking group, which makes most of its revenue in Asia, fell by 24 per cent to US$2.97 billion in the three months ended September 30 from a year earlier, it said on Monday, marking the worst quarterly drop since the last quarter of 2016. On a pre-tax basis, the biggest lender in Europe by assets recorded a profit of US$4.84 billion, below a consensus estimate of US$5.29 billion by analysts compiled by the bank.

The latest quarterly results included an US$606 million of additional customer redress provisions, including payment protection insurance in the United Kingdom, as well as US$120 million in severance costs. A provision for expected credit losses also increased by US$400 million, which included a charge “to reflect the economic outlook in Hong Kong” even though the lender said its biggest market remained “resilient” amid anti-government protests since June.

HSBC’s shares, one of the most closely watched on Hong Kong’s Hang Seng Index, lost as much as 3 per cent, their biggest intraday loss in more than two months, following the report card. The stock declined 2.3 per cent to HK$60.25 at the close of trading on Monday.

“Parts of our business, especially Asia, held up well in a challenging environment in the third quarter. However, in some parts, performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK, and the US,” Noel Quinn, who was named interim chief executive in August, said in a statement. “Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are, therefore, accelerating plans to remodel them, and move capital into higher growth and return opportunities.”

HSBC reshuffles decks as it braces for more challenging times

Shrinking profits could not have come sooner as a challenge for Quinn, who is seeking to put his stamp on the bank to land the job permanently after replacing John Flint in August. On Monday, Quinn said HSBC would accelerate its efforts to cut costs, which included previously announced plans to eliminate less than 2 per cent of its workforce and reduce wage costs by 4 per cent over the course of the year.

He declined to discuss the size of any headcount reductions during a post-earnings conference call with journalists on Monday. He called a media report earlier this month that as many as 10,000 jobs could be eliminated as “speculation”. People familiar with the discussions previously said the bank was considering job cuts primarily centred in Europe and higher-paid roles globally. As of September 30, the bank had 237,412 full-time employees worldwide and an additional 9,045 contractors.

Because the revenue environment has become more challenging than in the first half of 2019, HSBC said it no longer expect to achieve its return on tangible equity target of more than 11 per cent in 2020.

Hong Kong protests hit sales of major hotel operators, spirits makers

HSBC said that its revenue fell 2.9 per cent to US$13.4 billion in the quarter, reflecting in part lower activity in its global markets business. Net interest income also fell 1.4 per cent to US$7.57 billion, while operating expenses rose 2.2 per cent to US$7.97 billion.

Pre-tax profit in the bank’s global banking and markets segment dropped 32 per cent to US$1.23 billion in the third quarter. In HSBC’s retail banking and wealth management segment, pre-tax profit fell 45 per cent to US$1.11 billion in the three months ended September 30.

HSBC is first of the major banks in Hong Kong to report their quarterly results, giving a glimpse to markets on the impact of street protests that has helped drive the local economy into a technical recession. Standard Chartered is expected to report its earnings on Wednesday.

HSBC chairman Mark Tucker condemns violent protests in Hong Kong

Despite the headwinds, HSBC said adjusted pre-tax profit in its Hong Kong operations rose 1.3 per cent to US$3.02 billion in the third quarter, compared with an adjusted pre-tax profit of US$2.98 billion in the prior-year period.

Hong Kong has faced almost five months of demonstrations and escalating clashes between protesters and police, which has cut into sales at retailers, hotels and restaurants, as tourists have stayed away from the city and people have stayed home on weekends during the worst confrontations.

The city’s economy was already weakened by a trade war between the United States and China that has raged for more than a year.

Hong Kong’s leader Carrie Lam Cheng Yuet-ngor said the city had fallen into a “technical recession” as part of her policy address on October 16, while Financial Secretary Paul Chan Mo-po warned on Sunday the city was headed to negative economic growth for the full year. The city is expected to release its latest estimates for third-quarter growth on Thursday.

Quinn said HSBC was reviewing its plans and would update the market ahead of its full-year results in February. The group intends to have “presence” in continental Europe and the US after the planned reshaping.

“Clearly, we would view Asia generally, and Hong Kong specifically, as an opportunity for further growth and higher returns,” he said.

This article appeared in the South China Morning Post print edition as: HSBC profits miss market estimate

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