HSBC Holdings PLC (LON:HSBA) has reported a surprise drop in first-quarter profit due to higher operating expenses but sweetened the bad news with plans for a new US$2bn (£1.47bn) share buyback.
In the quarter ended March 3, the global bank’s pre-tax profit fell by 4% to US$4.76bn, down from US$4.96bn a year earlier, below the US$5.76bn consensus estimate compiled by the firm.
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The FTSE 100-listed lender’s profit fall mainly reflected a13% rise in operating expenses which outpaced reported revenue growth of 6% to US$13.7bn, thanks to higher deposit margins and balance growth, notably in Asia.
Overall, the group saw lending growth of US$17bn in the first quarter, increasing net loans and advances to customers by 2% in the quarter, while it maintained a strong capital base with a common equity tier 1 ('CET1) ratio of 14.5%.
HSBC said the rise in costs was due to investment in its retail banking businesses in its core markets of Britain and China.
Stronger revenue environment
The bank’s chief executive John Flint – who only took over in February - said: “A stronger revenue environment enabled us to invest in growing the business. In 1Q18, we increased investment in Retail Banking and Wealth Management to further grow our market share in the UK and mainland China.
"We also made strategic hires in our securities joint venture in mainland China, and invested to enhance our digital capabilities in all our global businesses. This targeted spending contributed to a rise in adjusted costs in the first three months of the year. We intend to deliver positive adjusted jaws for 2018."
HSBC – which made over 75% of its profits in Asia in 2017 - plans to grow its retail and corporate banking business in the region by hiring thousands of staff and opening new branches, a plan that has suffered some setbacks amid China’s slowing growth.
But despite this investment, Europe’s biggest bank by assets said it intends to initiate a share buy-back of up to US$2bn, which it expects to commence shortly.
But, it added: “Given the growth opportunities we currently see, we expect this to be the only share buyback that we announce in 2018.”
Shares sink
In mid morning trading, HSBC shares topped the FTSE 100 fallers list, down 3% to 700p.
Richard Hunter, Head of Markets at interactive investor, commented: “Expectations are always high for this banking behemoth and any disappointment tends to be pounced upon, as evidenced by the initial share price reaction.
“Even so, over the last year the shares have added 12%, as compared to a 3.7% jump for the wider FTSE100, and over two years the 62% rise is reflective of a bank whose fortunes have largely recovered.”
“With more pronounced growth elsewhere in the sector, however, the market consensus of the shares as a hold will remain difficult to nudge higher.”
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