Photographer: Luke Macgregor/Bloomberg

HSBC's Quarterly Profit Beats Estimates as Costs Contained

  • Operating expenses fell 6.6% in quarter from year earlier
  • Revenue dropped in all four of the bank's businesses

HSBC Holdings Plc reported a bigger first-quarter profit than analysts forecast, as Chief Executive Officer Stuart Gulliver guided the Asia-focused bank through turbulent global markets while paring back costs.

Pretax profit fell to $6.1 billion from $7.1 billion a year earlier, the London-based bank said on Tuesday, beating the $4.3 billion average estimate of 14 analysts compiled by the lender. Revenue fell 6 percent, less than the 14 percent forecast.

Cost-cutting measures imposed last year by Gulliver and Chairman Douglas Flint are starting to bear fruit as the bank trimmed 6,000 staff, and the CEO said he was confident of hitting expense targets by the end of 2017. Revenue fell in each of the bank’s four main businesses, led by a 21 percent drop in private banking and a 15 percent decline at its investment bank.

The bank’s efforts on costs were “better than expectations and will continue to be a management focus for this year, especially with the pressure on the top line,” Chirantan Barua, an analyst with Sanford C. Bernstein & Co. said in a note. “There was nil customer redress taken this quarter and nil legal provisions.”

HSBC shares fell 0.5 percent to 450.25 as of 9:39 a.m. in London, after earlier climbing as much as 3 percent. The stock has dropped 16 percent this year.

Falling Revenue

Revenue decreased to $15 billion from $15.9 billion a year earlier, according to the filing. Operating expenses fell 6.6 percent from a year earlier as Gulliver cited “increasing impact” from efforts to rein in spending.

In Asia, adjusted pretax profit fell 10 percent to $3.5 billion. Profit dropped in four of the lender’s five geographic regions.

“It’s tough out there for banks, and HSBC is no exception, particularly seeing as it is increasingly focusing its business on Asia, which is a weak market right now,” Laith Khalaf, senior analyst at Hargreaves Lansdown Plc, wrote in an e-mail. “However in common with several other U.K. banking stocks, things weren’t quite as bad at HSBC as investors had feared.”

The bank is still short of its 2017 return on equity target of more than 10 percent, posting a 9 percent return in the first quarter, down from 11.5 percent a year earlier. 

“Market uncertainty led to extreme levels of volatility in January and February, which affected our ability to generate revenue in our markets and wealth management businesses,” Gulliver said. He described the lender’s performance as “resilient in tough market conditions that affected the entire banking sector.”

Charges for bad loans doubled to $1.16 billion, compared with an estimate of $999 million, as the bank booked an additional $200 million of impairments related to its oil, gas, metals and mining lending. Energy sector downgrades in North America increased risk-weighted assets by $2.9 billion.

Risk-weighted assets rose during the quarter because of increased corporate lending, the bank said. HSBC plans a reduction of about $290 billion of total risk-weighted assets while redeploying $100 billion to $150 billion of those assets in Asia.

The bank’s common equity tier 1, a measure of its capital strength, remained at 11.9 percent compared with the end of last year. That was 0.2 percentage points less than Bernstein analyst Barua expected and may make the bank’s plans for a progressive dividend “untenable,” he said.

HSBC’s $5.2 billion sale of its Brazilian business to Banco Bradesco SA has been recommended for approval by the country’s competition agency, the bank said. Finance Director Iain Mackay said the lender expects to complete the deal before the end of June. The U.S. and Mexico, two other countries HSBC are trying to turn around, are “heading the right direction,” Gulliver said on a call with analysts today.

Gulliver, 57, and Flint, 60, the longest-serving duo at the helm of a European bank, are nearing the end of their terms: Flint is stepping down next year, and his replacement will start the search for a new CEO.

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