HSBC boosts dividend to woo income investors

HSBC (HSBA) took a break from the perennial debate over its corporate structure to say it was “considering” a special dividend of 21ȼ a share following the sale of HSBC Canada announced in November. The bank made a gain of $5.7bn (£4.7bn) on the $10.1bn disposal to RBC.

Having announced this so prominently, it would seem a virtual certainty that HSBC shareholders will now receive an extra unexpected special dividend this year. If the payment comes through as promised, the bank’s shares will yield a hefty 7.1 per cent for the year in what looks like a clear pitch to the bank’s large pool of income investors both here and in Asia. That impression is further reinforced by the expected return of quarterly dividends in 2023 and a bringing forward of potential share buybacks to the first quarter this year, if its capital ratio forecasts are met.

Management’s attempts to woo the shareholder base are possibly not unrelated to the ongoing argument between the board and HSBC’s largest single investor, Chinese insurer Ping An, which owns approximately 8.3 per cent of the bank. There was no mention of the break-up debate in the results, but management clearly feels that it must respond to Ping An’s concerns, without legitimising its proposals. The sale of HSBC Canada, for instance, comes alongside a push to expand its wealth management presence in the Asian market, echoing some of Ping An’s talking points about pivoting the business away from mature, low-growth markets. However, this stops short of breaking up the bank to focus entirely on Asia, as Ping An would like.

Operationally, the most interesting point was that market stress had clearly impacted some of HSBC’s customers – bad debt charges for the year were $3.6bn, but it was notable that around $1.4bn of this was booked in the final quarter. The company’s $16.7bn exposure to the Chinese property market is still its single biggest credit risk. As expected, HSBC booked an enhanced net interest margin for 2022 of 1.48 per cent, up 28 basis points, as global interest rate rises fed through.

Management isn’t taking any chances this year and its conservative guidance for its net interest margin was noted by Jefferies’ analysts, in a sign that the interest rate windfall for banks may be running out of steam. Consensus forecasts currently put HSBC on a forward price/earnings ratio of just 7.5 for 2023. The income looks tasty, but the shares clearly have an ‘internal conflict discount’. Hold.

Last IC view: Hold, 543, 1 Aug 2022