HSBC PLC (LON:HSBA) kicked off a week of bank earnings updates with a horrendous plunge in profits as it girded its loins for expected loan losses from the impact of the coronavirus pandemic around the world.
First-quarter pre-tax profit of US$3.2bn (£2.6bn) was down 48% from the same period last year, worse than the consensus analyst forecast of US$3.67bn.
The drop in profits mainly reflects a massive US$2.4bn increase in provisions for potential credit losses to US$3bn, as the lender calculates potential impairments that could result from the impact of the pandemic and the collapse in oil prices.
HSBC also took “a significant charge related to a corporate exposure in Singapore”, possibly relating to oil trader Hin Leong, which owes US$3.85b to its lenders.
Chief executive Noel Quinn said: “The economic impact of the Covid-19 pandemic on our customers has been the main driver of the change in our financial performance since the turn of the year.”
Revenue also fell 5% to US$13.7bn as a result of lower customer activity and cuts to interest rates by central banks around the world, though Quinn said revenues remained resilient in Asia and the retail banking and private banking divisions.
Net interest margin (NIM), the difference between interest charged on loan and paid on deposits, fell to 1.54% from 1.56% in the preceding quarter and 1.59% this time last year, with expectations from the FTSE 100 lender that there will be “material downward pressure on NIM in future quarters” from incurring the full impact of global rate reductions.
Further on the outlook, Quinn said the plan is to keep up strategic investment but “reduce operating costs to partly mitigate the reduction in revenue”, while also halting some of the bank’s ongoing transformation programme, including “pausing the vast majority” of planned redundancies.
“These factors are expected to lead to materially lower profitability in 2020, relative to 2019.”
Having earlier this month been asked by the UK financial watchdog to withhold dividend payments because of the pandemic, the bank said it will “assess the appropriateness of our medium-term financial targets during that period” including reviewing the dividend policy, around the time of its final results for 2020.
HSBC shares fell more than 1% on Tuesday morning to 411.8p, where they are almost 31% lower than where they started the year.
Analysts at stockbroker Shore Capital said the 30% profit miss versus consensus was primarily due to the 400% increase in impairments being higher than expected, with income in-line and a 3% reduction in costs slightly better than predicted.
With the CET-1 capital ratio broadly stable during the period at 14.6%, the analysts said this “demonstrates the strength of HSBC’s balance sheet”.
Nicholas Hyett at Hargreaves Lansdown said: “The fact HSBC has put aside a sizeable lump for coronavirus related loan defaults isn’t exactly a surprise and we’re actually reasonably impressed at how performance has held up so far.
“Loan growth has offset pressure from lower interest rates, while increased volatility in financial markets can actually be good news for the investment bank.”
While the bank’s capital base has been able to absorb the impairment and an increase in the risk profile of the bank’s loans without deteriorating significantly, Hyett said there are difficult times ahead.
“The pain from lower interest rates will mount as fixed loans roll-off, and reduced economic activity is also likely to bite in the trade finance and commercial banking businesses. If conditions get worse from here provisions for bad loans will increase, and together with credit downgrades that will eat into capital reserves.”
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