- As with Barclays, third quarter credit losses were significantly below forecasts
- “Resilient” profits from Asia again pushed up the group’s capital ratio
- Lender is keen to recommence dividends
Over to you, Threadneedle Street. That was the implicit message contained within third quarter results for HSBC (HSBA), which promised beleaguered shareholders that the board “will consider whether to pay a conservative dividend for 2020”.
As if those investors needed reminding, HSBC was forced by the Bank of England to halt its quarterly pay-out earlier this year, as the Covid-19 pandemic’s effects on the UK economy began to dawn on regulators. That almost all the lender’s profits are made in Asia – reported pre-tax profits of $3.2bn (£2.5bn) from the region actually surpassed the group level in the third quarter – was of little concern to the Prudential Regulatory Authority, the BoE arm charged with overseeing UK-headquartered banks’ capital.
So while a return to distributions would also factor in 2020 results and a call on the economic outlook early in 2021, the mention of a “regulatory consultation” sounded more like a promise to lobby on behalf of those investors – many of them Hong Kong individuals – who hold the stock for income.
Given the backdrop, quarterly numbers could hardly have made a better case for the bank’s financial resilience. Common equity tier one (CET1) capital ratio – the proportion of equity capital against total risk-weighted assets – shot up 60 basis points in the period to 15.6 per cent, thanks to a fall in the denominator, good capital generation and positive currency effects.
Expected credit losses increased by $785m, lower than the same period in 2019, four-fifths below the level of provisions booked in the second quarter and short of consensus analyst forecasts of $2bn. The figure also came in toward the bottom of the lender’s own forecast range, set out with interim results in August, that second half provisions could rise by between $1.1bn and $6.1bn.
That estimate was dependent on the scale of changes to HSBC’s outlook, though the bank now “assumes that the likelihood of further significant deterioration in the current economic outlook is low”.
A seemingly greater threat is posed by central banks, and not for the reasons already mentioned. The effects of further interest rate reductions led HSBC’s net interest margin to contract by a further 13 basis points in the quarter to 1.2 per cent, and are expected to intensify further net interest income headwinds in the fourth quarter. Even the world’s largest commercial lenders must yield to monetary policy.
What the bank can control, however, is the speed and scale of its much-trumpeted transformation programme. HSBC now believes it can beat targets to reduce gross costs by $4.5bn and reduce risk-weighted assets by $100bn by the end of 2022. Achieving the former will require more than $6bn in one-off costs, while the latter looks set to increase the focus on Asia even further.
Arguably, this should strengthen the bank’s hand in any dividend crunch-talks with regulators, who face an unenviable task of enforcing capital prudence without risking a permanent increase in lenders’ cost of equity. Such unintended consequences would work directly against another of the central bank’s statutory objectives.
Still, indications that the dividend will be ‘conservative’ and re-based in line with battered expectations for a global economy suggest some sort of compromise is reachable. Increasingly, HSBC resembles a corporate with the wrong legal address. Finding a solution to that anomaly is likely to take several years, but in the near-term, it probably makes sense for the regulator to adopt a tactic of appeasement. Hold at 319p.
Last IC View: Hold, 290p, 21 Sep 2020
