UPDATE 1 - HSBC hit by capital drop despite investment banking revenue rise
HSBC said it does not plan any further share buybacks later this year after a sharp drop in its capital ratios, although it managed to avoid the sizeable fall in investment banking revenues that afflicted many of its peers during the first quarter.
The Anglo-Asian lender said it had completed a US$2bn share buyback only last week and would start a further one for US$1bn in May, which was announced in February. But it said it did not expect any more buybacks this year after that, disappointing investors who have grown accustomed to them.
HSBC took the decision after its common equity Tier 1 ratio plummeted by 170bp to 14.1%, close to the bottom of its medium-term CET1 target of 14%–14.5%. About half of the drop was due to regulatory changes the bank previously flagged, including the implementation of Basel rules and Brexit, which affected the risk weighting on its holding of European sovereign bonds and also the treatment of spending on software, which the UK regulator treats differently from EU regulators.
Analysts and investors were more surprised about a US$3.1bn valuation loss due to hedging of interest rates. Finance director Ewen Stevenson said the bank hedges about 20% of its interest rate risk on a portfolio of securities and derivatives, and as interest rates have risen there has been a mark-to-market loss in the portfolio, which does not impact profit and loss but does impact capital.
Its expected credit losses in the quarter came in at US$642m, compared to a US$435m release during the same quarter last year.
That included a US$250m provision for its operations in Russia following the country's invasion of Ukraine. Stevenson said that reflected a "a full provision for everything we can see". The bank also took another US$160m for its China commercial real estate exposures, which added to a provision it took at the end of last year.
HSBC said the sale of its French retail operations in the second half would lower its CET1 ratio by another 35bp, further adding to the rationale to pause share buybacks. HSBC announced the sale of its French retail bank to Cerberus-backed My Money Group in June last year and said it would take a US$2.3bn hit on the deal at the time.
HSBC's London-listed shares were down 3.5% at 484p at mid-morning.
Rates boost
The flip side of the interest rate hedging hit is that higher rates will boost revenues in the coming quarters and next year, Stevenson said. That should underpin its push to lift return on tangible equity to above 10% in 2023, a target the bank has long struggled to meet. ROTE for Q1 was 6.8%.
“We think we’re into a cycle of very rapid and positive interest rate rises over 2022 and into 2023," Stevenson told reporters on a conference call.
“We’re one of the most interest-rate-sensitive banks in the world. It has a very material and positive impact on our returns and that’s why we’re very confident of getting back to double-digit returns next year."
HSBC recorded a 27% drop in first-quarter pre-tax profit to US$4.17bn, which was largely due to an increase in its buffer against loan losses.
Revenues came in 4% lower at US$12.46bn, primarily due to a less-than-spectacular quarter in wealth and personal banking, while costs were kept under control despite higher inflation as operating expenses fell 3% to US$8.31bn, the result of previous cost-saving initiatives as well as lower performance-related pay accruals.
CEO Noel Quinn struck a cautious note regarding future performance, although he was still able to point to some headway on medium-term targets. The bank has already surpassed its previous goal set in 2020 of lowering risk-weighted assets by US$100bn and it will now aim to achieve US$120bn by the end of the year. RWAs had been reduced by US$112bn by the end of Q1.
The bank was also buoyed by its lower operating expenses and said it was on track to grow its expenses by 0%–2% next year.
In global banking and markets, where the priority is to shift more assets to Asia and other fast-growing markets, adjusted revenues fell 4% to US$4.01bn, while, within that, capital markets and advisory revenues edged up 2% to US$290m.
This compared favourably with the big five US banks, who reported a 37% drop in investment banking revenues in Q1 from a year ago, led by an 80% plunge in ECM revenues.
HSBC attributed its steady performance to the continued growth of its US leveraged finance business, where it has been adding more resources, offsetting a slowdown in equity and debt capital markets.
In the markets and securities services division, revenues fell 2% to US$2.37bn as foreign exchange and equities revenues increased by 15% and 2%, respectively, although global debt markets revenues fell by almost half to US$208m, which the bank attributed to lower primary market activity, as well uncertainty caused by the Russia-Ukraine war and the continued stress in China's property sector.
Wealth and personal banking revenues fell 6% to US$5.23bn as an adverse movement in life insurance was only partly offset by higher revenue from personal banking. Commercial banking revenues increased by 9% to US$3.53bn as revenues across all products rose with fee-based products providing to be particularly strong during the quarter.
-Additional reporting by Steve Slater in London