HSBC PLC (LON:HSBA) has posted a smaller-than-expected 35% drop in quarterly profit and flagged an easing in bad debt provisions, citing an expected improvement in the economic outlook for its main markets
Reported pre-tax profit for the Asian-focused lender came in at $3.1bn for the quarter ended September 30, higher than the $2.07bn average of analysts’ forecasts compiled by the bank.
HSBC also said it expected losses from bad loans to be at the lower end of the $8bn to $13bn range it set out earlier this year.
“This latest guidance, which continues to be subject to a high degree of uncertainty due to Covid-19 and geopolitical tensions, assumes that the likelihood of further significant deterioration in the current economic outlook is low,” it said in the results statement.
The FTSE 100-listed bank revealed as well that it would embark on a transformation of its business model, seeking to switch its main source of income from interest rates to fee-based businesses and also accelerated plans to shrink in size and slash costs further than previously suggested.
The change in approach marks one of the biggest long-term shifts in strategy to date from Europe’s biggest bank, which has long touted its ability to generate interest income from its more than $1.5 trillion in customer deposits.
HSBC has been looking to reduce costs globally and in June resumed plans to cut around 35,000 jobs it had put on ice after the coronavirus outbreak.
The bank also said Tuesday that it will accelerate the transformation of its US business, where it has long struggled to compete with much bigger local players, and will provide an update on the plans with its 2020 full-year results in February next year.
Difficult times to be a bank
In a commentary on the HSBC numbers, Nicholas Hyett, equity analyst at Hargreaves Lansdown said: “These are difficult times to be a bank – low-interest rates are squeezing incomes on one side and bad loans push up the cost line on the other. However, there are signs conditions are stabilising and that’s given the HBC board the confidence to float the idea of a 'conservative' dividend at the end of the year.
"The flattening out of bad loan provisions stands out to us as particularly notable. While we suspect high levels of government support in the UK and internationally are playing an important role in keeping defaults down for now, the bank also thinks the longer-term economic outlook has improved. Interest rate pressure is here to stay though, and all things being equal that will hold back revenue growth."
"However," he added, "HSBC’s management think they have some self-help measures to hand to keep the bottom line moving forwards even if conditions remain tough. The bank now expects to beat its original $4.5bn cost-saving target by 2022, and is also recycling assets from lower returning markets like the US to regions where it thinks it can earn higher profits. If it can navigate that transition successfully HSBC should generate attractive returns and we’d expect a large portion of those profits to come back to shareholders as dividends. Exposure to high growth markets in Asia could keep the bank ticking over for decades.
"However, challenges remain, and on the dividend, in particular, we think any payment at the end of this year will be more nominal than substantial. HSBC may be a in a better place than some UK rivals longer term, but it’s not one to bank on just yet.”
In early London trading, HSBC shares were 6.2% higher at 339.20p.
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