HSBC Holdings PLC (LSE:HSBA) saw its shares plunge on Tuesday despite the giant lender upgrading guidance after rising interest rates lifted its income in the third quarter.
Bad loan provisions were bigger than expected due to UK economic uncertainty and the deteriorating situation in China, not helped by an additional announcement that finance chief Ewen Stephenson is stepping down at the end of this year.
On the plus side, the lender reported a rise in adjusted profit before tax (PBT) of US$6.5bn for the quarter, which was 8% above consensus forecasts.
Reported PBT was down due to loan provisions but 17% ahead of expectations, with net interest income and non-interest income at 5% and 11%, respectively, above consensus for 7% higher revenue, according to analysts at UBS.
But shares in HSBC fell more than 7% in London, dragging down fellow Asia-focused peer Standard Chartered PLC (LSE:STAN) 3.8%, as well as Barclays PLC (LSE:BARC) off 1.2%, Lloyds Banking Group PLC (LSE:LLOY) down 1% and NatWest Group PLC (LSE:NWG) off 0.9%.
Credit impairments
More specific to HSBC is that its fortunes are increasingly tied to China and Asia, so the power grab by President Xi Jinping confirmed in recent days has spooked investors in many China-focused businesses.
But the London, Hong Kong and Shanghai based bank also made a £1.1bn reported provision for bad loans - or credit impairment charges or expected credit losses (ECL) - to reflect “increased economic uncertainty, inflation, rising interest rates and the ongoing developments in mainland China's commercial real estate sector”.
The lender said the macroeconomic environment has deteriorated during 2022, pointing to the war in Ukraine and ongoing impacts from the pandemic lifting inflation, triggering rises in interest rates, and slower global growth.
HSBC noted that recent economic policy in the UK increased uncertainty around the path of future Bank of England policy rates, with potential implications for the sector.
The ECL provisions were 27% above the consensus forecast, said the UBS analysts, entirely driven by US$0.3bn of provisions for China real estate CRE and US$0.2bn for UK macro uncertainty.
HSBC upgraded guidance for net interest income to US$32bn for this year, based on the current consensus for global interest rates.
But for 2023, guidance was trimmed to “at least US$36bn” from US$37bn before, due to the impact of sterling weakness against the US dollar, a higher cost of funding and low-single-digit lending growth, while ECL charges are expected to be at the higher end of guidance.
The bank's CET1 capital ratio of 13.4% at the end of September was below the medium-term target range of 14.0% to 14.5%, with management stating the intention is to “manage it back” to within that range by the first half of next year “through revenue growth and cost control, as well as through risk-weighted asset and capital actions”.
UBS analysts said the guidance for 2023 was now “broadly in line with existing estimates” and think it is “cautious guidance” given a stronger-than-expected net interest margin (NIM) for the third quarter.
Comparing HSBC with UK peers
Boding well for more UK-focused banks in the FTSE 100, which are due to report later in the week, HSBC reported higher mortgage balances in the UK - up $2bn - and stronger commercial bank lending.
For HSBC this was partly offset by reductions in a “more subdued” Hong Kong.
The UK also provided increased lending for HSBC's Global Banking & Markets arm from higher overdrafts in the UK, described as a reversal of the seasonal reduction of loans and deposits in the first half.
In the Wealth & Personal Banking (WPB) arm, for the nine months of the year to date, interest rate rises contributed to a rise of US$2.2bn or 29% in net interest income, with the UK, Asia and the Americas all noted for contributing to “strong” balance sheet growth.
WPB deposit balances in HSBC UK increased by US$9bn or 5% in the nine-month period, and mortgage lending rose in the UK by US$9bn. Unsecured lending also increased in the UK.
Third-quarter profit before tax in WPB jumped 35% to US$2.4bn, driven by a US$1.2bn increase in adjusted revenue, reflecting the benefit of interest rate rises and balance sheet growth in both the UK and Hong Kong.
In commercial banking, profit was up 13% to US$5.6bn for the nine-month period, reflecting an increase in adjusted revenue across all products and in all regions, notably in Asia and the UK. In Q3, profit was up 17%, again driven by interest rates.
Disappointment around CFO departure
Alongside the results, HSBC revealed that Stevenson will be stepping down as its group chief financial officer and as an executive director at the end of December and will leave the company next April.
Replacing him as CFO will be Georges Elhedery, who has been co-CEO of global banking and markets since March 2020, having joined the company in 2005 in the markets division.
He has a degree in engineering from École Polytechnique in Paris and a postgraduate degree in statistics and economics from ENSAE.
Greg Guyett has been appointed sole chief executive of global banking and markets (GBM) division, effective immediately.
Current group chief executive Noel Quinn told media he was not stepping down and intended to remain in his role “for many years to come”.
Analyst Ian Gordon at Investec said Stevenson leaving was “a peculiar decision” and “regrettable” and Jason Napier at UBS said he thought “the market will be disappointed”.
Stevenson was "well regarded" said Gary Greenwood at Shore Capital and "the change therefore comes as a surprise, especially at a time when the group is facing a strategic challenge from its largest shareholder, Ping An".
Russ Mould at AJ Bell said: “Stevenson had a good track record in his previous job helping to rehabilitate NatWest (formerly Royal Bank of Scotland) and shareholders will be disappointed not to have his steady hand at the tiller during the current turmoil."
His departure, Mould added, “may also make HSBC more vulnerable to pressure from its largest shareholder Ping An to break up the bank”.
Valuation
Simon Peters, portfolio manager at Algebris Investments, said: “UK banks are seeing their best results in a decade as higher interest rates translate into higher deposit margins. Banks can finally make money on the half of their balance sheet that has provided minimal returns for years.”
However, with economies slowing, he acknowledged that markets are worried about the credit cycle – though he predicted that European energy supply shortages will not be as bad as expected and so the economic slowdowns and recessions are “likely to be milder than some of the wilder forecasts suggest”.
ShoreCap's Greenwood noted that HSBC’s shares are up 6% in the year to date, outperforming the FTSE All-Share index. At the previous session's closing price of 475p, it traded on a trailing 0.75 times tangible net asset ratio, versus the group’s forecast return on tangible equity (RoTE) of over 12% by 2023.
"Our last published fair value was 695p (46% upside), which is based on a sustainable RoTE of 12% and includes a 5% haircut for geopolitical risk (in addition to our usual 5% haircut for litigation and conduct risk).
"Since this was set, the dollar has strengthened relative to sterling which (in the round) could be beneficial although potentially offset by a slightly more cautious tone to management guidance and a surprise change in CFO," the ShoreCap analyst concluded.