HSBC’s profit resilience may face sterner tests

  ​  HSBC’s , resilient bottom line may face some stiffer challenges. Europe’s largest bank on Monday reported that third-quarter earnings had doubled from the same period a year earlier and said it was buying back a further $3 billion of stock, despite a hit from troubled Chinese real estate loans. Yet the benefits of higher interest rates are wearing off while costs are stubbornly rising. It’s probably no coincidence that CEO Noel Quinn’s targets leave room for bigger setbacks. 

SINGAPORE, Oct 30 (Reuters Breakingviews) – HSBC’s (HSBA.L), (0005.HK) resilient bottom line may face some stiffer challenges. Europe’s largest bank on Monday reported that third-quarter earnings had doubled from the same period a year earlier and said it was buying back a further $3 billion of stock, despite a hit from troubled Chinese real estate loans. Yet the benefits of higher interest rates are wearing off while costs are stubbornly rising. It’s probably no coincidence that CEO Noel Quinn’s targets leave room for bigger setbacks.

Shareholders were on alert for trouble from China after smaller rival Standard Chartered (STAN.L) last week unveiled surprise writedowns that sent its shares tumbling. Yet even though HSBC set aside a further $500 million to cover possible losses on loans to mainland property groups, its overall bad-debt charge for the quarter was roughly the same as a year ago. Quinn even predicted that a major correction in China’s property market, which has been battered by weak pricing and stricter government policies, is over.

The bank’s $7.7 billion pre-tax profit was sufficiently robust that it could absorb a $600 million hit in the quarter from selling securities in its treasury portfolio and reinvesting the proceeds in higher-yielding paper. HSBC also flagged that the same exercise would produce another $400 million loss in the final three months of the year. Its London-listed shares barely budged.

Yet while Quinn was quick to highlight the bank’s ability to return spare capital to shareholders, undemanding full-year targets give him a buffer. For example, HSBC expects net interest income in 2023 to be above $35 billion. Given that it churned out $27 billion-plus in the first nine months of the year, it’s hardly a challenge.

Besides, the rising interest rates which have swelled HSBC’s top line may have peaked. The bank’s net interest margin slipped to 1.7% in the latest quarter, from 1.72% in the previous three months. Meanwhile, costs are proving stubborn, although HSBC blamed the 2% rise in third-quarter operating expenses on one-off technology costs, inflation and pay hikes.

Quinn is also sticking to his target for return on tangible equity in the mid-teens, despite HSBC clocking an annualised 17.1% in the first nine months of the year, excluding one-off gains. Investors appear to share his lack of conviction. HSBC shares trade at around 0.9 times the bank’s tangible book value at the end of September. That leaves plenty of scope for leaner times.

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HSBC on Oct. 30 reported pre-tax profit of $7.7 billion for the three months to Sept. 30, more than double the level from the same period last year. But the figure was below the $8.1 billion average of analysts’ estimates compiled by the bank.

The bank set aside $1.1 billion for expected credit losses and other credit impairment charges in the third quarter, mostly in line with the same period of 2022. It included $500 million related to mainland China’s troubled commercial real estate sector.

HSBC said it remains committed to targeting a return on tangible equity in the mid-teens for 2023 and 2024, excluding the impact of acquisitions and disposals. Its adjusted annualised return on equity for the third quarter was 14.3%.

The bank’s London-listed shares were up 0.9% at 606 pence by 0900 GMT on Oct. 30.

Editing by Peter Thal Larsen and Oliver Taslic

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 HSBC’s , resilient bottom line may face some stiffer challenges. Europe’s largest bank on Monday reported that third-quarter earnings had doubled from the same period a year earlier and said it was buying back a further $3 billion of stock, despite a hit from troubled Chinese real estate loans. Yet the benefits of higher interest rates are wearing off while costs are stubbornly rising. It’s probably no coincidence that CEO Noel Quinn’s targets leave room for bigger setbacks. 

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