HSBC Holdings Plc (HSBA) Chief Executive Officer Stuart Gulliver said strengthening economic growth and rising interest rates should help bolster revenue in 2015 after Europe’s biggest bank reported weaker first-half profit.
Pretax earnings dropped 12 percent to $12.3 billion from $14.1 billion a year earlier, according to a statement from London yesterday. That was the first decline in the period since 2009 and compares with the $12.9 billion average estimate of four analysts surveyed by Bloomberg. Revenue fell 9.3 percent to $31.2 billion.
Gulliver has exited at least 68 businesses since taking over in 2011, as the bank invests in its most profitable markets amid increased regulation and compliance costs. An economic recovery in the U.K. means interest rates may rise as early as the fourth quarter, with “positive implications” for revenue, the CEO said yesterday. Goldman Sachs Group Inc. analysts said last month HSBC is among banks that would benefit “exponentially” from higher borrowing costs.
“We expect improvement in revenue in 2015,” Gulliver, 55, told reporters on a conference call yesterday. “You should assume that any improvement would be lagged six months after rates go up.”
Goldman Sachs analyst Vincent Chang estimated HSBC could add $1.3 billion in net interest income a year if borrowing costs went up by 25 basis points, allowing the bank to reprice mortgages, as well as corporate and personal loans. Its consumer banking and wealth-management business as well as commercial banking would benefit the most, the CEO said.
HSBC’s net interest margin, the difference between its income from lending and its cost of funding, declined to 1.95 percent in the first half from 2.17 percent a year earlier, reflecting lower yields on customer lending in North America and Europe, the bank said.
Gulliver singled out the U.K. economy as having a “firm recovery” and said the bank saw China expanding at a faster pace this year than previously projected. Pretax profit in Asia fell 15 percent to $7.89 billion in the first half, while Europe declined 18 percent to $2.26 billion. Earnings dropped 20 percent in Latin America to $374 million.
Pretax profit at the consumer banking and wealth management division fell 7 percent to $3.05 billion in the first half, while rising 15 percent at the commercial banking unit. The global private banking business had profit of $364 million, up from $108 million a year earlier.
HSBC is striving to keep bad loans under control and cut as much as $3 billion of costs. Loan impairment charges and provisions shrank to $1.8 billion from $3.1 billion as the bank invested in risk and compliance functions, HSBC said.
Chairman Douglas Flint warned yesterday that a gamut of new rules from global regulators and greater focus on financial crime and conduct was contributing to “disproportionate risk aversion” among employees.
“Staff are clearly very focused on the penalties for getting things wrong and are building that into the way they think,” Flint said on a call with reporters. “We’re not in the risk avoidance business, we’re in the risk management business. We’ve got to avoid getting to a state where people believe there is a zero risk tolerance.”
Underlying operating expenses rose 2 percent to $18.2 billion. Costs as a proportion of revenue increased to 58.6 percent from from 53.5 percent, exceeding Gulliver’s “mid-50s” target.
HSBC’s common equity Tier 1 ratio, a measure of financial strength, increased to 11.3 percent from 10.9 percent at the end of last year.
“The headline numbers were a bit weaker than the market expected, which looks to be due to higher than expected costs, partly offset by better performance on impairments,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, who has a hold rating on the shares.
The banks’ capital level supports a “progressive dividend policy,” Gulliver said in the statement. The bank awarded shareholders a second interim dividend of 10 cents a share.
Profit at the securities unit, known as Global Banking & Markets, dropped 12 percent to $5.03 billion. HSBC earned less money from its foreign-exchange activities, the biggest contributor to is markets business, with revenue falling to $1.43 billion compared with $1.83 billion. Income from credit and equities increased.
“HSBC has delivered continuing improvement on the impairment line and some further progress on costs, but revenue pressure reflects the twin challenges of increased reliance on Global Banking & Markets and a continuing decline in group net interest margin,” said Ian Gordon, an analyst at Investec Ltd. in London with a hold rating on the stock. The GB&M unit was “respectable in a broader industry context.”
Standard Chartered Plc (STAN), which makes more than three-quarters of its earnings in Asia, warned in June its first-half profit probably fell 20 percent, dragged down by lower financial markets revenue. Barclays Plc posted a 50 percent drop in first-half investment bank profit last week as fewer clients traded in cash equities, rates and currencies.
In the U.K., banks are also facing higher regulatory costs with proposals to build firewalls around lenders’ consumer banking operations. That will cost the bank “hundreds of millions of pounds,” Flint said.
The lender set aside $111 million in the second quarter to compensate customers improperly sold loan insurance. That takes the firm’s total provision to about $3.4 billion. Redress for clients in the first half fell to $234 million, from $412 million.
Lloyds Banking Group Plc (LLOY), the U.K.’s biggest mortgage lender, last week set aside a further 1.1 billion pounds ($1.5 billion) for legal redress.
Hang Seng Bank Ltd., the Hong Kong lender controlled by HSBC, fell as much as 1.4 percent in Hong Kong trading today after reporting lower first-half profit due to an accounting change and reduced gains from property valuations.
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