HSBC Holdings Plc's $3.5 billion of share buybacks since last July, along with the lender's global footprint, have helped prop up the stock to give investors in London and Hong Kong a total return in U.S. dollar terms of almost 40 percent over the past 12 months.
That's all well and good, but even after better-than-forecast first-quarter results, shareholders should be asking how the bank proposes to turn around five years of annual revenue declines.
The problem is, unless HSBC plans to take on the kinds of risks it did prior to the global financial crisis, there's not an awful lot it can do, even in an environment of rising borrowing costs.
While there's no doubt HSBC is a large beneficiary of higher rates and has plenty of deposits it can lend, getting consumers to borrow is another matter.
Hong Kong is the world's least affordable housing market and there's already a mortgage war afoot. Competition is rife in the U.K., too, so it's hard to see how HSBC can ramp up lending there. And the bank must contend with the weaker pound since last June's Brexit vote.
HSBC reported an adjusted pretax profit for the first quarter of $5.94 billion on Thursday, beating estimates of $5.3 billion. Adjusted revenue rose 2 percent to $12.8 billion: Analysts had forecast a 9 percent drop.
Net interest income came in at $6.79 billion, and CEO Stuart Gulliver pledged to continue to slog away at removing low-return risk-weighted assets. The bank had a common equity tier 1 ratio of 14.3 percent on March 31, up from 13.6 percent at the end of December, and a leverage ratio of 5.5 percent. No new buyback was announced.
Fortunately for investors, there are bound to be more share purchases down the track as capital is released from HSBC's U.S. businesses. Analysts expect as much as $2 billion of buybacks in the second half.
But relying on capital giveaways isn't a strategy for the long term, and in fact leads to diminishing returns for stock prices. The bank's $3.5 billion of buybacks last year exceeded its $2.5 billion in net income. As analysts at Bernstein put it, the math looks weird: HSBC's 2016 group earnings were just 6.6 cents, out of which it paid cash dividends of about 41 cents and buybacks of about 13 cents.
Good news came in the form of HSBC's global banking and markets division, or investment banking. Revenue there rose by 14 percent, excluding credit and funding valuation alterations, while adjusted pretax profit was $1.7 billion versus $1.3 billion in the first three months of 2016.
Also promising, HSBC's pivot to Asia: The Pearl River Delta region chalked up a 17 percent surge in loans during the period while annualized new business premiums in the bank's insurance business increased 13 percent and assets under management jumped 15 percent.
The big dilemma remains HSBC's retail arm and how it can use its store of wealth to boost earnings. Mortgage growth was just 2 percent in Asia, mainly in Hong Kong, Australia and mainland China, and 1 percent in the U.K. The lender's advances-to-deposits ratio slipped to 68.8 percent in the first quarter, from 70 percent 12 months ago.
HSBC can buy back all the shares it wants and keep the dividend love going. But unless it gets more customers, both new and existing, coming in the door to borrow, it's hard to see the bank's post-Brexit glow being sustained.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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