HSBC reports 35% fall in pre-tax profits

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HSBC

HSBC has today reported an 11% decline in third quarter revenues to $11.9bn. The figure was primarily driven by the impact of the coronavirus and the effect of lower interest rates on interest income. Revenues across the banking giant are down 14.8%.

That in turn led fall 35% in profit before tax tear-on-year to $3.1bn. That was largely driven by the lower revenues, with impairments for bad loans in the quarter some 11% lower than the same period last year.

Noel Quinn, Group Chief Executive, said: “These were promising results against a backdrop of the continuing impacts of Covid-19 on the global economy. I’m pleased with the significantly lower credit losses in the quarter, and we are moving at pace to adapt our business model to a protracted low interest rate environment. We are accelerating the transformation of the Group, moving our focus from interest-rate sensitive business lines towards
fee-generating businesses, and further reducing our operating costs. We also intend to increase our rate of investment in Asia, particularly in wealth, the Greater Bay Area, south Asia, trade finance and sustainable finance.

“The Group’s capital and liquidity ratios strengthened further in the quarter despite the challenging economic conditions. A decision on whether to pay a dividend for the 2020 financial year will depend on economic conditions in early 2021, and be subject to regulatory consultation. We will seek to pay a conservative dividend if circumstances allow.”

In August, HSBC announced plans to accelerate its job cuts after interim profits dramatically fell. The bank blamed bad loans linked to the COVID-19 pandemic. The cost of the bad loads could reach more than $13bn worldwide.

As a result, the planned 35,000 job cuts will begin immediately, with the total numbers and regions of the losses to be announced in due course.

HSBC shares rose 5.7% in early trading.

Industry reaction

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown

These are difficult times to be a bank – low interest rates are squeezing incomes on one side and bad loans push up the cost line on the other. However, there are signs conditions are stabilising and that’s given the HBC board the confidence to float the idea of a “conservative” dividend at the end of the year.

The flattening out of bad loan provisions stands out to us as particularly notable. While we suspect high levels of government support in the UK and internationally are playing an important role in keeping defaults down for now, the bank also thinks the longer term economic outlook has improved. Interest rate pressure is here to stay though, and all things being equal that will hold back revenue growth.

However, HSBC’s management think they have some self-help measures to hand to keep the bottom line moving forwards even if conditions remain tough. The bank now expects to beat its original $4.5bn cost saving target by 2022, and is also recycling assets from lower returning markets like the US to regions where it thinks it can earn higher profits. If it can navigate that transition successfully HSBC should generate attractive returns and we’d expect a large portion of those profits to come back to shareholders as dividends. Exposure to high growth markets in Asia could keep the bank ticking over for decades.

However, challenges remain, and on the dividend in particular we think any payment at the end of this year will be more nominal than substantial. HSBC may be a in a better place than some UK rivals longer term, but it’s not one to bank on just yet.

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