HSBC stock boosted by regulatory change involving BoCom stake

Third quarter pre-tax profit increases to US$5.59 billion after adjustments

PUBLISHED : Monday, 07 November, 2016, 12:05pm
UPDATED : Monday, 07 November, 2016, 11:00pm

HSBC’s share price rose in Hong Kong and London after the bank reported an improvement in its capital buffer in its third quarter earnings, with analysts saying the larger buffer would allow the lender to maintain its dividend while making a future share buyback more likely.

At the close of trading in Hong Kong on Monday, HSBC’s stock was up 3 per cent, while in London it had advanced 4.91 per cent as of 13.50 GMT.

HSBC reported that its third-quarter-pre-tax profit rose 7 per cent on an adjusted basis to US$5.59 billion from US$5.24 billion last year, beating analysts expectations of US$5.09 billion.

On a non-adjusted basis, however, profits slumped 86 per cent.The adjustments included alterations for changes in credit spread on the bank’s debt and a US$1.7 billion loss on the sale of its Brazilian unit.

HSBC’s common equity tier 1 capital ratio stood at 13.9 per cent at the end of the third quarter, above its target range of between 12.5 and 13 per cent, and markedly up from the 12.1 per cent in the second quarter.

Following the global financial crisis, capital has become a scarce resource for banks, as regulators around the world require banks to build up much greater capital buffers.

“With capital improving materially...investors will gain confidence in the sustainability of the dividend, which could potentially support the stock in the near term,” said Anil Agarwal, analyst for Morgan Stanley.

The main reason for the improvement was a change in the way the UK’s Prudential Regulation Authority assesses the risk related to HSBC’s minority stake in Bank of Communications.

“For yield investors, who have been the source of support for valuation of this stock, [the likelihood HSBC will maintain a dividend] keeps the stock in the safety zone into the next 6-9 months,” said Chirantan Barua, an analyst for Bernstein.

There have been rumours that HSBC might seek to reduce or sell its stake in BoCom, but on a call to analysts HSBC chief executive Stuart Gulliver confirmed that the bank would maintain its stake, adding that BoCom remained the bank’s “flagship in China”.

Gulliver did not say what the increased capital would be used for. He said that it did “open up the possibility of further share-buybacks in future”, though also said that the money could be used to expand HSBC’s loan book. He said it did not seem likely that the money would be used to make an acquisition.

The HSBC number was a surprise to most and must have caught some [short sellers] off guard
Brett McGonegal, Capital Link International

New banking regulations, so called Basel 4, are expected early next year so it is also possible the larger capital buffer may be required to meet tougher regulations, though it is not yet known what form these regulations will take.

In its interim report on August 3, HSBC announced a share buy-back following the sale of its Brazilian division, which contributed to a 13 per cent increase in its share price since the announcement. The bank said on Monday the buy back programme was 59 per cent complete, and was expected to finish late this year or in early 2017, depending on the state of the market.

In Asia, HSBC said that principal retail banking and wealth management performed relatively well due to the impact of stock market movements on its insurance business in Asia, compared with a weak third quarter of 2015. HSBC also said personal lending volumes had increased in Hong Kong, though revenues in this regard had fallen overall, and that it had gained market share in trade financing in Hong Kong.

Also in Hong Kong, Gulliver said the bank had performed well on the mortgage side, growing its market share, but noted that the recent changes in stamp duty were likely to affect property sales volume in the short term.

Brett McGonegal, chief executive at Capital Link International, said that broader market trends had also contributed to HSBC’s stock gains.

“I would think the move is much more a part of the market sentiment at this moment as many are buying the market thinking the US election will bring Clinton to victory. HSBC still trades below book which suggests they are not out of the woods,” he said. “The HSBC number was a surprise to most and must have caught some [short sellers] off guard.”

An earlier version of this article was amended to say HSBC reported an 86 per cent profit slump, rather than a loss, on a non-adjusted basis