By: Martin Arnold in London and Jennifer Hughes in Hong Kong
Stronger Q1 sends shares up in relief rally after earnings miss late last year
HSBC has fuelled investors’ hopes that it will buy back another $2bn of shares after its quarterly results outstripped analyst expectations because of strong trading conditions, rising interest rates and low loan impairments.
Europe’s biggest bank by assets has in recent years struggled to reverse a slide in revenues and to keep a lid on costs. But a strong performance in its main Asian operation and at its investment bank helped to break this trend in the first quarter.
Pre-tax profits fell 19 per cent year on year in the quarter. But after being adjusted for one-offs and currency moves, they rose 12 per cent to $5.9bn, surpassing consensus forecasts. HSBC shares closed up 2.9 per cent at 663.8p in London.
After a disappointing slide in last year’s profits, the bank sought to brighten the mood among investors by buying back $3.5bn of shares.
A jump in HSBC’s common equity tier one ratio, a vital benchmark of a bank’s strength, from 13.6 per cent to 14.3 per cent takes it well above its 12-13 per cent target. This prompted UBS analysts to predict that it would use some of this excess capital to fund a $2bn share buyback this year.
Iain Mackay, finance director, refused to be drawn on this, saying that the bank was “taking a pause” on share buybacks before reviewing it at the half-year. “We will assess with our regulators our ability to do more buybacks as the year progresses.”
He said that the bank’s US operation had paid its first dividend to the parent since the financial crisis, a crucial move as most of the group’s $8bn of excess capital is held in the US.
It is expected to take three to five years to return all the US excess capital to the group, Mr Mackay said.
He added that the deferred prosecution agreement hanging over the bank since American regulators fined it for money laundering in 2012 would be a factor in how quickly it can release capital from the US. The DPA is due to expire at the end of this year, but it may be extended.
In the first quarter, HSBC benefited from a fall in bad-debt impairments after writing back $100m of provisions for a recovery in oil and gas loans. This offset higher restructuring costs and a $210m provision for UK payment protection insurance customer redress.
While reported revenues of $13bn for the quarter were down 13 per cent compared with the same period a year ago, the bank attributed the fall to the sale of its Brazil operation last year. It said that underlying revenues were up 2 per cent.
It also blamed a change in the fair value of its own debt for the fall in reported pre-tax profits to $5bn. Return on equity dipped from 9 per cent to 8 per cent, while earnings per share fell from 20 cents to 16 cents, but still beat expectations.
“This is a good set of results. The increase in adjusted profit was driven by strong performances in three of our four global businesses,” said Stuart Gulliver, chief executive.
Adjusted revenues from retail banking rose 15 per cent, while those from its global banking and markets division rose 10 per cent. Commercial banking revenues inched up 1 per cent, but its private bank declined 8 per cent.
Mirroring a surge in trading income from the big US investment banks, HSBC reported strong growth in trading of credit, rates and equities, which more than offset a drop in foreign exchange income.
Hong Kong, the bank’s biggest profit-generating centre, reported higher deposits and savings balances. Wider interest rate spreads also helped the bank.
Chirantan Barua, analyst at Bernstein, said that HSBC enjoyed “a massive beat” on fee income from life assurance and wealth management in Asia. James Chappell, an analyst at Berenberg, said “the only disappointment [was] no further buybacks”.
The improved first-quarter results are a boost to Mr Gulliver, who has told the HSBC board that he will quit as chief executive next year, and hopes to leave the bank in a strong position.
In March, the bank signalled progress on its succession plan, announcing Mark Tucker, chief executive of AIA, the Asian insurer, as its new chairman.
The appointment was the first time the bank had gone outside its own ranks to fill the position in more than 150 years of its existence.
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