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HSBC shares jump after announcing US$2bn share buyback and first-half profit growth

The buyback is expected to be completed by year end, taking the total amount of buybacks over the past year to US$5.5bn
HSBC has seen a major turnaround in profits

HSBC Holdings PLC (LON:HSBA) shares gained after today announcing a US$2bn share buyback alongside an increase in first half profits.

The bank expects to complete the buyback by the end of 2017, taking the total amount of stock it has pledged to buy over the past year to US$5.5bn.

"In the past 12 months we have paid more in dividends than any other European or American bank and returned US$3.5bn to shareholders through share buy-backs,” said outgoing chief executive Stuart Gulliver.

“We have done this while strengthening one of the most resilient capital ratios in the industry.”

In reaction, shares rose 1.98% to 759.90p in afternoon trading. 

Revenue falls on currency impact, Brazil disposal

The buyback was unveiled along with a 12% increase in adjusted pre-tax profit to US$12bn, beating consensus forecasts, or 5% to US$10.2bn on a reported basis. 

The lender, however, posted an 11% decline in reported revenue to US$36.3bn, reflecting foreign exchange headwinds and the disposal of its Brazil operations.

Still, the company’s results show a significant turnaround from the corresponding period in the previous year when it reported a 29% drop in pre-tax profit.

HSBC began a restructuring in 2015, saying it would cut risk weighted assets (RWAs) in slow-growth markets and reduce costs.

In the first half, HSBC sliced off a further US$29bn in RWAs, bringing the total amount it has removed to US$296bn since the start of its overhaul.

HSBC on track to acheive cost savings target

The group said it remains on track to achieve US$6bn of annualised cost savings by the end of the year, in line with the guidance provided at the full year results in February.

The lender also raised its capital buffers hot on the heels of the Bank of England’s decision to lift its requirements amid concerns about the impact of Brexit on the financial sector. HSBC’s common equity tier 1 (CET1) ratio was 14.7% at 30 June, compared to 12.1% at the same time in 2016.

HSBC has spent about US$500mln on splitting its retail bank from its investment banking arm to meet UK ringfencing rules. The Financial Conduct Authority's new requirements are designed to protect retail banking activity from unrelated risks elsewhere in the banking group.

READ: HSBC's co-head of investment bank in line for possible promotion as next chief executive

HSBC to lose CEO and chairman 

The bank is also about to see some big changes at the top with Gulliver set to leave in 2018 and chairman, Douglas Flint, stepping down in October. AIA chief executive Mark Tucker was appointed in March to replace Flint but HSBC is yet to announce a successor for Gulliver.

“As the group approaches a periodic transition in leadership, it is extremely pleasing to report that, in the first half of 2017, it delivered a strong set of results across its major businesses,” said Flint.

“As well as being financially robust, these results added further evidence of the successful repositioning of the group since 2011. This has created a solid foundation, with attractive optionality, for the future.”

READ: HSBC boss confirms plans to shift UK jobs to Paris in event of 'hard Brexit'

HSBC prepares for Brexit, upbeat on global economic outlook

Flint said customer activity across all business segments was resilient in the first half despite uncertainties arising from geopolitical tensions and the UK’s withdrawal from the European Union. HSBC has previously said it would move 1,000 jobs from London to Paris in the event of a 'hard' Brexit.

The UK is already starting to see a slowdown as a result of Brexit, as the BoE warns on consumer indebtedness and as an increase in inflation constrains consumer and business confidence and spending. 

In HSBC's other markets, Flint noted that China’s economic data is showing resilience after a slower period, business investment is increasing in the US and confidence is improving in the eurozone with the prospect of a structural reform in France.

Flint believes that having a diversified business across different markets, combined with a strong balance sheet, means the bank will be able to weather any risks going into the second half. 

Laith Khalaf, senior analyst at Hargreaves Lansdown said while HSBC may be listed in London, it is far from a UK operation.

"Three quarters of its profits come from Asia, which shows which side of the world HSBC’s bread is buttered on," Khalaf said. "This means the key driver of the bank’s performance will be the east, not the west, positioning the bank well to capitalise on the growth of developing Asian economies, though that of course comes with a risk warning attached."

Goldman Sachs raises target price

Goldman Sachs lifted its target price by 2% to 770p and said it expects a further US$3bn share buyback in 2018. The bank, however, reiterated a 'neutral' rating, citing risks of worsening revenues and higher costs.

"We see this as a solid set of results, but would expect a somewhat muted share price reaction: the strong recent performance of the shares suggests to us that today’s solid print is likely already reflected in the price," Goldman said.

Goldman said underlying pre-tax profit beating the company-compiled consensus estimate by 12% was driven by resilient revenue trends in retail in Hong Kong, global banking and markets and a higher corporate centre contribution.

The bank added that investors will "undoubtably focus" on what implications the increase in the CET will have on future capital returns while it sees the strong loan growth in the second quarter of 3% quarter-on-quarter as an "encouraging entry point".

Absence of conduct and litigation charges a bonus, says AJ Bell

Unlike banking peers Lloyds Banking Group PLC (LON:LLOY) and Barclays PLC (LON:BARC) - which announced extra provisions for the payment protection insurance mis-selling scandal in their interims last week - HSBC's interims were free of any mention of further conduct and litigation charges.

"The absence of any fresh conduct and litigation charges is also a welcome bonus (even if the risk-warnings section of the report features a lengthy list of potential legal risks) and HSBC actually wrote back some provisions it had taken previously, said AJ Bell investment director, Russ Mould.

Mould added: “Such a powerful performance will reassure shareholders that China’s economy is not about to drop into a debt-laden downturn and drag HSBC with it, especially as total charges for bad loans fell in the first half to US$663mln from $2.4bn a year ago."

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