HSBC HSBC -6.98%
Holdings PLC said its profit for the first quarter fell 28% year-on-year as it made provisions to worsen loans in Russia and China, but the banking giant said the rise global interest rates would help it achieve its longer-term goals.
The London-based lender’s profit attributable to common shareholders totaled $2.8 billion from January to March. While profits were boosted a year earlier by the release of $435 million in provisions as the global economy recovered from the worst of the Covid-19 pandemic, in the first three months of this year HSBC’s profits were rocked by $642 million in expected new credit losses.
The new expected losses included about $250 million related to Russian borrowers and some $160 million related to China’s property sector, against which it had also taken charges in the previous quarter. Still, HSBC’s profit rose quarter over quarter and beat analysts’ consensus forecasts as credit loss charges came in below expectations.
Revenue fell 4% from a year ago to $12.5 billion, below expectations. The bank said that figure was reduced by $342 million in “market impacts” from life insurance as weak stock markets reduced the value of the company’s stock portfolio. HSBC said strict Covid-19 restrictions and temporary branch closures in Hong Kong also weighed on its revenue for the quarter.
Chief executive Noel Quinn said lending volumes were up across the bank, while its personal banking, insurance and trade finance businesses showed good growth. “I am encouraged by our start to the year,” he said in a statement.
Mr Quinn said that despite the economic uncertainty, rising interest rates had made the bank more confident in its ability to generate a return of more than 10% on tangible equity next year.
Lenders like HSBC can make higher profit margins on loans when interest rates are higher. In recent months, government bond yields and interbank lending rates have jumped as the US Federal Reserve and other central banks have begun to tighten monetary policy to combat rapid inflation.
Government bond prices have fallen this year, pushing yields higher. The yield on the benchmark 10-year US Treasury stood at 2.825% on Monday, up 1.329 percentage points since the start of the year.
At the same time, however, the bond market sell-off has caused a short-term setback to HSBC’s capital ratios, as it holds a large portfolio of public and corporate debt as a partial hedge against falling interest rates. . The bank has recorded fair value, pre-tax losses of about $4.9 billion so far this year through April 19 on holdings.
After disclosing $3 billion in share buybacks in its last two rounds of results, HSBC said it was unlikely to introduce any further buybacks in 2022 given the pressure on its capital position. The bank said its Tier 1 core capital ratio could fall below its minimum target of 14%, due to volatility in its hedge pool. It warned that the planned sale of its retail business in France, agreed last year, would also reduce the ratio by 0.35 percentage points.
The Hong Kong-listed HSBC share fell 4.2% on Tuesday to HK$49.50, or $6.31 a share, underperforming a slightly higher broader market.
Even after Tuesday’s plunge, HSBC stock has gained around 5.5% so far this year, beating broader market benchmarks. Hong Kong’s flagship index, Hang Seng, fell nearly 15%.
Last week, an anonymous HSBC shareholder asked the bank to consider unleashing the value of its Asian operations, saying it should consider options such as a possible spinoff that could split the bank into two businesses focused on Asia and elsewhere.
The investor hired a public relations firm to help publicize his demands. He says the bank’s management has failed to implement its strategy, particularly on costs, and investors are wary of the global banking model due to political risk.
HSBC said on Tuesday it was on track to keep adjusted operating expenses for 2022 in line with last year’s figures, despite inflationary pressures, and said it planned to cut costs by more than $2 billion this year.
Chief Financial Officer Ewen Stevenson rejected the shareholder’s suggestion to split HSBC. This fundamentally undermines the bank’s strategy, which is based on global connectivity, he said. “That’s the essence of the whole business model.”
Stevenson added that the bank’s strategy is the right one and is reflected in its share price. HSBC has had no contact with the shareholder and does not know his identity, he said.
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