HSBC Holdings PLC (LSE:HSBA) beat expectations with first-quarter results but further shareholder returns look likely to be off the table.
The lender's quarterly profit beat City forecasts by 5%, though income was 2% below expectations, said analysts at UBS.
This was despite the group taking just under US$1bn of combined impairment charges for Russia/Ukraine, Chinese commercial real estate and macro-economic uncertainty, pointed out Gary Greenwood at Shore Capital.
READ: HSBC profits hit by Hong Kong lockdown and loss provisions for inflation
That said, he noted that both tangible net asset value (TNAV) and capital levels (CET1) were lower than expected due to fair value movements caused by recent changes to interest rate expectations, in other words the steepening yield curve.
The CET ratio was down 1.7 percentage points from the previous quarter at 14.1%, versus consensus expectations of 15.0%, with Greenwood saying the shortfall compared to expectations was primarily due to lower-than-expected CET1 capital rather than higher than expected risk-weighted assets, putting it towards the bottom of management’s target range of 14.0-14.5%.
This means no further share buybacks are expected this year, he said.
As the first out the gate for the FTSE 100 banks reporting this week, HSBC’s results are seen as a bellwether for the sector and the global economy, said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
On the plus side for UK peers, net interest income is being buoyed by rising interest rates and a very active housing market, especially in the UK, with total mortgage lending up a huge US$24bn year-on-year.
“The macro environment has been factored into a positive outlook for interest income, but the raising of interest rates is only one consideration," said Lund-Yates.
“While this helps interest income rise, the wider global economic outlook is much harder to predict. The soaring inflation which these interest rate hikes are designed to address, makes the picture murky. Rumblings of recession chatter are being heard, and if this were to happen, all banks would feel the pinch."
She said the main takeaway from the results is that further buybacks are off the table for 2022.
“That will be a disappointment to banking investors, who may have become accustomed to the glut of buybacks from the sector in recent months.”
UBS said the Covid restrictions in Asia, lower market volumes and market appetite accounted for the income miss "and are not permanent in our view".
While UBS said the lower CET1 capital will feed through to some lower buyback forecasts, this is predicted to "reverse through income in time" and, getting deep into the outlook for rates, UBS analysts said interest rate gearing "is the key reason to own this stock, we think".
HSBC's "extremely cautious" figures suggest each 100 basis points of 'parallel curve moves' (a move in the yield curve when interest rates across all maturities change by the same number of basis points), would add US$5.3bn to net interest income in the first year, assuming half of asset yield increases are passed to depositors, rising to US$7.1bn by year-three.
This would imply an uplift to 2021 underlying net interest income (NII) of 20% in year-one.
"Remarkably, we think, consensus 2024 NII is just 36% above 2021 levels, despite this rate gearing and management's plan to grow loans by 5% per annum. While slower GDP growth and higher credit risk charges likely attend COVID19 and geopolitical conditions we think consensus EPS forecasts and current P/E valuation significantly understate the approaching uplift to HSBC's profitability."