HSBC steps up buyback programme

Shareholders in HSBC (HSBA) will be glad to learn that the increasingly Asia-focused bank has not been subject to the expected volume of delinquent loans linked to Covid-19. This fed through to a net release of $900mn (£662mn) in credit provisions.

And while the long-term damage to the global economy is unknowable at this stage, the bank’s statutory profit, although marginally shy of consensus estimates, has improved markedly due to the partial recovery in lending opportunities, with fee income also on the rise. All of the group’s locales were profitable in 2021, most notably the UK banking operation. In all, customer lending balances increased by $23bn on a constant-currency basis, primarily driven by growth in mortgage balances.

From an operational perspective, expenses were broadly unchanged at $34.6bn, and the group is confident that it will keep a lid on costs through 2022. The bank’s tier 1 capital ratio was broadly unchanged at 15.8 per cent, achieved despite a marked step-up in shareholder returns. Gross risk-weighted assets have been pared back by a cumulative $104bn over the last two years, against an original three-year target of $110bn.

Management remains wary of the potential impact of a prolonged inflationary period. On the one hand, it could precipitate successive interest rate hikes, nominally a positive development for the banking sector, but it could also dampen recovery in the global economy. For now, global trade volumes provide encouragement, and group chairman Mark Tucker notes that there are signs that “supply chain bottlenecks will ease as the year goes on, although when and how remains uncertain”.

Although we in the UK might be learning to live with the virus, elsewhere the clinical situation is not so clear-cut. Ironically enough, Hong Kong recently reported a record number of new daily infections. The bank, therefore, has retained $600mn to cover the lingering impact of the pandemic.

FactSet consensus guides for a 7.8 per cent return on tangible equity in 2022, rising to 9.5 per cent and 10.2 per cent in the following two years.

Like any global operation, HSBC must take regional issues on board, such as the faltering Chinese property market. But if central banks continue to turn the screw, the bank is confident of achieving its goal of a double-digit return on equity in 2023, a year earlier than expected. Shareholders can also look forward to another $1bn in share repurchases following the completion of an existing $2bn buyback programme. However, given ongoing macro uncertainties, we retain our neutral stance. Hold.

Last IC View: Hold, 439p, 25 Oct 2021