HSBC surprises with more capital returns

After Barclays (BARC) and NatWest (NWG), HSBC (HSBA) completed the trifecta of unexpected capital returns among the big high street banks with a surprise $2bn (£1.6bn) share buyback announced in its half-year results, on top of an earlier scheme dating from the first quarter. Like all banks, HSBC benefited in the half from a widening net interest margin of 1.7 per cent, up 0.5 percentage points, as interest rates in all its core geographic areas rose. The performance meant that management could upgrade its forecast for interest income for the year to $35bn, a modest upgrade on its previous guidance.

The bank, which is less vulnerable to domestic regulatory pressures when compared with its rivals, has enjoyed a relative stock market honeymoon over the past few quarters, whereas many institutions have given back most of the share price gains that were based on higher interest rate assumptions. A return to a quarterly paid dividend, a key demand of HSBC’s Hong Kong retail investor base, has also helped to support the shares.

The performance of wealth management was another highlight for the bank. Net interest income was the key to the division’s overall performance, with net income up by 60 per cent to $16bn as cash balances in all areas generated higher returns. However, it wasn’t all plain sailing. The ever-present threat of China’s dysfunctional property market made itself felt in the results. Of the expected credit losses set aside in the first half, $300mn of this was linked to commercial real estate in mainland China. In total, HSBC has made expected impairment allowances of $1.3bn. This was not limited to China and the UK business also a booked a $300mn charge related to potential commercial banking bad debts.

Digging deeper into the results showed the problems that China, either directly or through the Hong Kong channel, is posing for lenders with exposure to commercial property investments. Out of $13bn of property loans to mainland China or Hong Kong, over $8.5bn are now rated either satisfactory or lower, with $3.5bn considered to be outright impaired. How the situation develops is dependent on macroeconomic factors, but it seems certain that HSBC will be booking losses in this loan book for some time to come – although so far this has stayed within the City’s forecasts.

The net effect of the positive results is to temporarily damp down the long-standing dispute between the board and its largest shareholder, Chinese insurance group Ping An, over the potential carve out of its European and Asian operations.

UBS forecasts a price/earnings ratio of 6.7 for the year, rising to 7.7 for 2024. That represents a premium to the sector, currently, which does not yet suggest value. Hold.

Last IC View: Hold, 639p, 21 Feb 2023