HSBC Climbs Most Since April on $2.5 Billion Stock Buyback Plan

HSBC Plans $2.5 Billion Buyback as Profit Falls 45%
  • Dividend to be kept at current level for ‘foreseeable future’
  • ROE target dropped amid economic, political uncertainties

HSBC Holdings Plc rose the most since April after it announced a $2.5 billion stock buyback for this year and said it plans more share repurchases while keeping its dividend at the current level for the foreseeable future.

Chief Executive Officer Stuart Gulliver is returning half the equity freed up from selling the bank’s Brazil unit, with the rest boosting the firm’s capital ratio to 12.8 percent. That outweighed concerns about profitability, as pretax earnings fell 45 percent to $3.61 billion from a year earlier, and the bank removed a target of surpassing a 10 percent return on equity by the end of next year.

“There is absolutely an intention to be in a position to do further buybacks,” using capital no longer needed by its shrinking U.S. operations, Finance Director Iain Mackay said on a conference call with analysts. The Federal Reserve approved the firm’s U.S. unit returning “substantial” capital to the parent company next year, which “could lead to another buyback,” he said.

The shares climbed 3.8 percent, the most since April, to 500.6 pence at 8:32 a.m. in London. That’s the stock’s highest level since January.

Stuart Gulliver
Stuart Gulliver
Photographer: Billy H.C. Kwok/Bloomberg

‘Strong Capital’

While the bank stepped back from its “progressive” dividend policy, many analysts had expected a cut from last year’s payout instead of maintaining that level.

“The buyback signals HSBC’s strong capital position and should reassure investors of its ability to maintain the current 51-cent dividend,” Citigroup Inc. analysts led by Ronit Ghose wrote in a note to clients.

Pretax profit reported by the bank compared with the $3.9 billion average estimate of 14 analysts compiled by the lender. Second-quarter revenue fell 15 percent to $14.5 billion, beating the $13.6 billion average estimate. Operating expenses were $10.4 billion, more than the $9.2 billion analysts expected.

Charges for bad loans were $1.2 billion, more than the forecast $1.1 billion, as the bank suffered higher charges from bad debts in the oil and gas, and metals & mining sectors, particularly in the U.S. and Canada, Mackay said in a telephone interview.

‘Paranoid’ Outlook

The lender cited economic and political uncertainties for abandoning the timing of its ROE target, while saying the 10 percent goal remains “appropriate.” The bank posted a 7.4 percent return in the first half, down from 10.6 percent a year earlier.

As one of the few global lenders left, “we get paranoid about absolutely everything that happens everywhere,” Gulliver said in an interview. “There’s a lot of political uncertainty around, and the Brexit vote would be a very good example of that.”

Executives said the bank’s current plan to reduce annual costs by $5 billion, which includes about 25,000 job reductions, would likely be extended by two years. The bank can’t deepen the current program within its 2017 timeframe without hurting revenue, the CEO said.

Cost Cuts

“If there is not a pickup in revenue, we would need to look at further cost actions and we would need to look at capital actions in order to get to that 10 percent” return, Gulliver said on a call with analysts. “My expectation is we will continue into 2018 and ’19 with a further program of cost management.”

HSBC is contending with slowing economic growth in China and the prospect of a recession in the U.K., amid a program to eliminate thousands of jobs and redeploy as much as $150 billion of assets to Asia. CEO Gulliver, 57, and Flint, the longest-serving pairing at a big European bank, are nearing the end of their terms as Flint prepares to step down next year, with his replacement starting the search for a new CEO.

“Nothing that has happened in this turbulent period casts doubt on the strategic direction and priorities we laid out just over a year ago,” Chairman Douglas Flint, 61, said in a statement. He noted the “exceptional volatility” in financial markets triggered by the U.K. vote to leave the European Union.

Rates Impact

Since 2011, HSBC has slashed more than 87,000 jobs, exited at least 80 businesses and reduced the bank’s vast global footprint to 71 countries and territories from 88. Alongside most other European banks, executives have been struggling to boost profitability in the face of record-low interest rates, misconduct fines and rising regulatory costs. That task has been made more difficult with the U.K. economy projected to slow after the country voted to leave the European Union.

HSBC will lose a “not insignificant, but not material” $100 million of net interest income if the Bank of England reduces its main interest rate by 25 basis points on Thursday, Mackay said in an interview. If the central bank imposes negative interest rates, “we would apply it to companies, and we would apply it immediately to banks and non-bank financial institutions,” but HSBC has not written to clients warning of such a prospect as Royal Bank of Scotland Group Plc has, he said on a call with analysts.

For details on restructuring at HSBC’s investment bank, click here

HSBC’s common equity Tier 1 capital ratio rose to 12.1 percent, exceeding the average of estimates compiled by the lender, from 11.9 percent in December. The figure may be boosted to 12.8 percent this quarter from the proceeds of the $5.2 billion sale of the bank’s Brazilian business, it said.

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