HSBC announces Q3 results with profits surging 74%

HSBC’s profits rose 74% in the third quarter as improving economic conditions allowed the bank to release hundreds of millions of pounds originally set aside for a potential jump in loan defaults during the pandemic.

The London-headquartered bank said pretax profits rose to $5.4bn (£3.9bn) in the three months to 30 September, up from $3.1bn a year earlier. It easily beat City forecasts for profits of $3.8bn for the quarter.

HSBC credited continued economic stability for helping increase its profits, as improving conditions allowed customers to repay their debts on time. It meant HSBC could release about $700m from the pile of cash it built up after the pandemic started to help cushion the blow of a potential surge in defaults.

The money nearly offset the $785m loan loss charge that HSBC logged during the same period last year. Analysts had expected a further $236m charge in the third quarter.

Most of the provisions released in the third quarter – about $563m – were linked to HSBC’s UK business, where the economic outlook has improved over the past 12 months. The Chief Financial Officer, Ewen Stevenson, explained that the loan loss provisions built up in the UK in 2020 reflected fears around the impact of Brexit and Covid, at a time when experts could not predict the success of the country’s vaccination programme.

Underlying revenue also fell 1% to $12.2bn in the third quarter, reflecting negative market impacts in life insurance and lower trading revenues in debt markets following a particularly strong result last year. The global low interest-rate environment also continues to weigh.

Provisions for bad loans swung from an $823m charge to $659m release, underpinning a 36% improvement in pre-tax profit of $1.6bn.

CEO Noel Quinn said: “We believe that the lows of recent quarters are behind us”. The banking group also announced a new $2bn share buyback programme.

HSBC’s shares were unmoved following the announcement.

Industry Reaction

Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, commented: “HSBC is a giant in its industry, and with signs of more positive economic conditions comes a brighter set of results.

“Pre-tax profits have been buoyed by a huge swing in expected credit losses – with a chunky charge this time last year, turning into a release that buffer this quarter. The group is so confident about the direction of travel, it’s announced a $2bn share buyback programme.

“A CET1 ratio well above target risks looking like a waste of uninvested equity, and capital returns are one way to deal with that. However, a lack of available investment opportunities could be a potential concern for more growth minded investors.

“HSBC is the latest bank to hint at an expected hike in interest rates. This helps elevate the mood because higher interest rates improve the profitability of loans. All in, the picture is looking healthier for HSBC, but while interest rates remain on the floor, the group will continue to be held back.

“One thing the group has in its favour is a highly diversified business model, which means when one area struggles, another can pick up the slack. Both its sprawling geographical footprint, plus alternative banking activities, like consulting and trading businesses, means HSBC is in a more enviable position than others.”