Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Mrs. Chan can breathe a sigh of relief. HSBC, one of the most popular stocks among Hong Kong's income-seeking small shareholders, isn't cutting its dividend.

They had reason to be concerned. Pretax profit fell 14 percent in the first quarter (though that was a smaller decline than analysts had estimated) and bad-loan charges doubled. Still, the London-based bank kept its payout intact, at a time when many peers have opted to conserve cash. The question now is how long that policy can continue.

Few companies in stocks-obsessed Hong Kong are as widely held as HSBC, the second-biggest component of the city's benchmark Hang Seng Index after Tencent, owner of the WeChat messaging app.

The bank's generous payouts play a big part in its allure. HSBC, which was founded in Hong Kong and makes most of its profit in Asia, hews to a ``progressive dividend policy,'' and hasn't cut its quarterly distribution since 2009.  In a call with analysts, Finance Director Iain Mackay stuck to that language, barring ``significantly higher capital requirements" or hits to long-term profitability.

With the bank's shares losing more than a third of their value in the past two years, the dividend yield has risen to more than 7.5 percent, and was above 8 percent in early April. That's more than double the 3.4 percent average of the Morgan Stanley World Financials Index.

The policy of maintaining or increasing dividends is even more striking considering that rivals such as Standard Chartered Bank and Deutsche Bank have reduced or omitted payouts.

Unloved Asia
Bank stocks focused on the region have underperformed global peers
Source: Bloomberg

On Tuesday, announcing a $6.1 billion pretax profit after a fourth-quarter loss and a bigger reduction in costs than analysts forecast, HSBC said it would pay a dividend of 10 cents a share, unchanged from last year.

The results may come under the could-have-been-worse heading that helped buoy Standard Chartered. That bank's investors focused on reduced bad loans rather than a 64 percent drop in pretax profit. At Deutsche Bank, too, the attention was on lower legal expenses.

For Mrs. Chan, however, there's a deeper question over HSBC's future. It's one that Standard Chartered, despite its recent relief rally, also is trying to address.

HSBC needs growth in Hong Kong, still the source of at least one-third of pretax profit, and in the Pearl River Delta hinterland, home to almost 60 million people, on which CEO Stuart Gulliver has staked the company's future.

First Hong Kong. As Gadfly's Andy Mukherjee noted, the city isn't facing the brightest future. Until last year it was the best place in Asia for a bank, with loan growth averaging about 12 percent a year in the five years through 2015, according to Morgan Stanley analyst Anil Agarwal. (In Australia, by contrast, loans dropped 0.7 per year over the same period.)

But reduced borrowing in China as the economy slows, a flagging local real estate market, and a slowdown in trade finance are starting to bite HSBC and Standard Chartered. HSBC's Hong Kong lending fell around 4 percent in the first quarter, ``a clear sign that the bank is suffering," said Bernstein analysts, who stuck to an underperform call on the stock. (Overall, analysts have 19 ``sell''  or ``hold'' ratings on the stock, compared with 11 ``buys,'' according to data compiled by Bloomberg.) 

Then there's the Pearl River Delta: HSBC wants the region to account for $1 billion of profit in the ``medium term," against about $100 million now. Yet HSBC and its affiliate Hang Seng Bank still have what Bernstein calls a ``sub-scale footprint" for what could be a very expensive expansion plan. And competing with the big Chinese state-owned banks on their home ground won't be easy.

Still a Long Way Back
HSBC and Hang Seng Bank have just over 70 branches combined in southern China's Pearl River Delta
Source: Bernstein Research, Company Reports
Footnote: HSBC owns around 62 percent of Hang Seng Bank.

One piece of good news is that HSBC's cost-cutting plans are on target. The disposal of its Brazil business is a step closer after that nation's Competition Agency recommended that its board approve the $5.2 billion sale to Banco Bradesco. That would pare HSBC's Latin American operations back to a small Mexican unit.

Gains from sales like that will help keep the dividends coming. But for how long?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net