HSBC Q2 Results Solid; Interim Dividend Reinstated in 2023

Business Strategy & Outlook:

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

Over the past few years, the bank restructured and exited unprofitable markets and low-returning regions. However, the restructuring was not enough and the bank struggled in global banking and markets, Europe, and the U.S. To address these issues, the bank announced another restructuring plan at the end of 2019. The restructuring is proceeding as planned with USD 104 billion of the risk-weighted assets redeployed or reduced at the end of 2021. A target of USD 120 billion by 2022 is achievable. Close to USD 3.3 billion in cost has been taken out of the business and the completion of the USD 5.5 billion program is expected by 2022. Cost savings is expected to be generated from digitalization, resulting in automation, a decline in headcount from operations and technology, and reduced office footprint. The restructuring plan allows HSBC to focus on its strengths in Asia and the U.K., the Asia region is growing in terms of importance for global trade, increased urbanization, and a growing middle class. The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, given it is the leading international bank in China. The latter is achieved through the bank’s long operational history and investments in China. As a result, HSBC is well positioned to capture economic growth in asset management, yuan internationalization, and consumer and corporate lending.

Financial Strengths:

Much attention has been paid to HSBC’s dividend and its ability to return capital. HSBC to be in good financial health. Risk-weighted assets have declined as the bank improved its capital efficiency and redeployment of USD 100 billion in RWA, by 2022, is expected to lift profitability. RWA intensity has already declined to below 30s at the end of 2020 from above 40% in 2014. The common equity Tier 1 ratio was 13.6% at the end of second-quarter 2022. Management expects to maintain the common equity Tier 1 ratio at a range of 14% to 14.5% in the long term. With the coronavirus situation improving, the U.K. regulator is allowing U.K. banks to reinstate its dividends in 2021. HSBC provided an updated dividend policy of 40% to 55% of reported earnings per share applies from 2022, compared with a fixed dividend of USD 0.51 per share previously. A share buyback of USD 2 billion was announced in 2021 and completed in early 2022, and a further USD 1 billion buyback was announced at the end of 2021 to begin in April 2022. The common equity Tier 1 ratio of 13.6% at end of the second quarter is below the bank’s target of 14% to 14.5%, and this may dip below 14% in the third quarter due to the divestment of its French retail business and acquisitions. Profitability to drive a higher common equity Tier 1 ratio from 2023, and expected further capital management initiative in 2023. The bank’s liquidity position is also strong. Customer deposits make up around 60% of group funding, equity at 10%, and the balance from the wholesale debt and trading liabilities. The bank’s liquidity coverage ratio and net stable fund ratio both exceed regulatory requirements.

Bulls Say:

HSBC’s exposure to the fastest-growing economies ensures robust demand for its products and services, from deposits and wealth management to international trade finance.
The benefits of geographic diversification were highlighted during the financial crisis. Although HSBC took large losses in its North American segment, its other operations picked up the slack, and the bank escaped without reporting a loss.
HSBC has been operating in many banking systems for decades, building up a deep well of local knowledge and relationship that is hard to duplicate.

Company Description:

Established in 1865 in Hong Kong, London-based HSBC is one of the largest banks in the world with assets of USD 3 trillion and 40 million customers worldwide. It operates across 64 countries with around 220,000 full time staff. Key regions include Asia, Europe, the Middle East and North Africa, and North America. United Kingdom and Hong Kong are the two largest markets for the bank. The bank offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking.

(Source: Morningstar)

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