HSBC Holdings Plc’s $100 billion bet on Asia is bearing fruit, driving its third consecutive increase in quarterly revenue just months before Chief Executive Officer Stuart Gulliver hands the reins to John Flint.
Asia posted the biggest revenue gain among of the bank’s five regions, helping it report higher-than-expected third-quarter adjusted revenue of US$13 billion. During the period, HSBC added US$1.1 billion of loans in Guangdong, the southern Chinese province where the lender has targeted expansion. Dampening sentiment, costs were 6 per cent higher than analysts expected.
“What we saw was good: continued revenue growth coming through the Asia and U.K. businesses, the vast majority of our markets saw balance sheet and revenue growth,” Finance Director Iain Mackay said in an interview. The bank paid out $300 million extra in performance-related pay because the strategy is "progressing well and ahead of our expectations,” he said.
In February, 28-year company veteran Flint will inherit a bank in expansion mode after years of belt-tightening. Gulliver spent much of his tenure shrinking and imposing central control over HSBC’s sprawling global network, exiting almost 100 businesses and 18 countries while dealing with several costly misconduct scandals.
In June 2015, HSBC said it would redeploy billions of dollars of assets to Asia, betting on higher returns as China’s economy expanded at a faster pace than Europe or the U.S. Just as the bank was putting an increased emphasis on China, the stock market imploded, but Gulliver stuck to his guns, saying the meltdown didn’t alter the country’s strong fundamentals.
“Our pivot to Asia is driving higher returns and lending growth, particularly in Hong Kong and the Pearl River Delta,” Gulliver said in Monday’s statement. More broadly, “growth in loans and advances translated into higher adjusted revenue in all three main global businesses,” he said.
The adjusted revenue number reported by HSBC beat the average $12.7 billion estimate of 15 analysts compiled by the firm. Adjusted pretax profit for the third quarter fell 1 percent to $5.44 billion, compared with a projection of $5.41 billion. Operating costs rose 7 percent to $7.8 billion, missing the average $7.3 billion estimate.
“Overall the cost miss is likely to disappoint some, although the reiteration of 2017 cost guidance should limit the impact,” Keefe, Bruyette & Woods analysts Richard Smith and Edward Firth said in a note. The miss “implies small earnings reductions near term.”
The shares fell 1.3 per cent to 738.6 pence at 10:30 a.m. in London, paring their advance this year to 12 per cent. In Hong Kong, where the bank is also listed, the stock initially rose before ending the day 0.7 per cent down.
Revenue rose slower than costs -- a measure the bank calls jaws -- which management has identified as a strategic issue to address. Adjusted jaws was a negative 4.9 per cent. The bank still expects jaws to be positive for the full year, Mackay said in a telephone interview.
Part of the reason costs rose in the quarter was investment in technology, specifically the bank’s mobile-banking application, he said. In September, analysts at Autonomous Research criticized HSBC’s app and called the lender a “laggard” in innovation.
At the securities unit, the bank’s traders fared better in the third quarter than others in the City of London. Fixed-income and currency trading revenue dropped only 5 per cent, compared with the 34 per cent plunge in the same business Barclays Plc reported last week. HSBC said it increased its market share in European rates and credit trading.
“We’d already apologized earlier for doubting HSBC’s ability to grow its massive global franchises, and we’re happy to apologize again on the back of these strong quarterly results,” Cenkos Securities Plc analyst Sandy Chen said in note. “HSBC’s premium rating already reflects the market’s confidence that this growth is sustainable, and these expectations could accelerate further if rate hikes spread globally.”
The shares in London and Hong Kong have been rising this year after the bank unveiled plans to repurchase $5.5 billion of stock, with executives hinting they’re prepared to do more as the firm’s capital buffer grows. The firm’s common equity Tier 1 ratio retreated to 14.6 percent from 14.7 per cent at the end of June, above its target range of 12 percent to 13 percent.
Mackay has previously said as much as US$8 billion could be repatriated from its U.S. operations and a portion of this would be allocated to buybacks. HSBC’s North American unit passed a Federal Reserve stress test in June, clearing the way for more than US$3 billion of capital to be returned to shareholders, analysts said at the time.
Despite making progress, Gulliver has still left incoming CEO John Flint with work to do. Return on equity was below the bank’s target of more than 10 percent, coming in at 7.1 per cent. Finance director Mackay said the bank wouldn’t exceed the goal this year.
Flint will also have to navigate the bank through the U.K.’s divorce from the European Union. Executives said today they will wait as "as long as we possibly can" before moving up to 1,000 investment bankers to Paris, but still expect costs to be as high as $300 million as the bank is planning for a “pretty hard Brexit,” Mackay said.
--With assistance from Paul Panckhurst