HSBC Holdings PLC (LON:HSBA) said its pivot to Asia is driving higher returns and lending growth as it reported a sharp rise in third quarter profits.
The bank said pre-tax profit in the three months to September 30 leapt to US$4.6bn from US$843mln the same period a year ago.
Loss from sale
However, shares fell 1.39% to 737.80p as analysts said the profits were skewed by a weaker pound, a US$1.7bn loss on the sale of its Brazil operations to Banco Bradesco S.A in July last year and some accountancy adjustments for the early adoption of IFRS 9 requirements.
On an adjusted basis, pre-tax profit fell 1% as higher operating costs offset an increase in revenue. Expenses increased 7% as HSBC invested more in its retail banking and wealth management and paid out more in bonuses to staff.
"After taking out the effect of the Brazilian sale, the underlying numbers are not quite as flattering to the progress made by HSBC. Profit in the third quarter actually fell backwards slightly, as operating costs rose faster than revenues," said Laith Khalaf, senior analysts at Hargreaves Lansdown.
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Revenue rose 36% to US$12.9bn in the third quarter from US$9.5bn the previous year on a reported basis.
But excluding the impact of the Brazil disposal and foreign exchange movements, revenue increased just 3%.
Outgoing chief executive Stuart Gulliver said the lender "maintained good momentum" during the period with higher revenue in its three main global businesses.
"We also continued to make good progress with the strategic actions we set out in 2015," he said
"Our international network continued to deliver strong growth in the third quarter, and our pivot to Asia is driving higher returns and lending growth, particularly in Hong Kong."
Asia focus
Asia accounts for 87% of HSBC’s pre-tax profit as it boosted growth in loans, insurance and wealth management.
Earlier this month, the company said that Gulliver will be replaced by John Flint as chief executive in February 2018. The appointment was announced shortly after AIA chief executive Mark Tucker took over the role of HSBC's chairman, replacing Douglas Flint.
Under John Flint’s leadership, the London-based bank is expected to expand its operations in Asia amid worries about the impact of Brexit on the UK’s financial sector.
Group finance director Iain Mackay said: "We’ve got good momentum, we’re seeing good investor appetite for new business coming through not only in Hong Kong but further afield in Asia."
HSBC’s shift in focus to Asia and its scaling back of operations, including the sale of the Brazil business and job cuts, has aided a successful turnaround following the 2008 global financial crisis.
The company’s pivot to Asia is centred around China’s Pearl Delta region where it has committed billions in investments and plans to boost retail and management business.
In the third quarter, the Asia business delivered a 10% increase in pre-tax profit to US$4bn as the customer base for retail banking and wealth management in mainland China has expanded by more than 70% so far this year.
HSBC strengthens capital buffers
HSBC has also been able to bolster its capital buffers despite multiple shares buybacks, including the most recent US$2bn in July of which 71% has been completed.
The common tier 1 ratio, a measure of capital, was 14.6% at the end of September, slightly below 14.7% at the end of June but higher than 13.6% at the end of 2016.
The CET 1 ratio is expected to rise in the medium term as the bank repatriates about US$8bn trapped at its US subsidiary following approval by the Federal Reserve last year.
Return on equity, a key measure of profitability, nearly doubled to 8.2%. HSBC is targeting ROE of 10% but did not indicate a timeframe for achieving its goal.
"We won’t achieve 10% by the end of 2017, but we are heading in the right direction," Mackay said.