Here’s what’s turbocharging HSBC profits

A resurgent share price is welcome and it seems the storm may be over for the Asia-focused bank. The City certainly thinks so.

HSBC (LSE:HSBA) has flexed its financial muscles as it continues to emerge from the horror show of 2020.

The numbers are flattered by further bad debt releases, in what will be the likely theme of the season, but the announcement of a share buyback programme is a positive endorsement of the bank’s own confidence in prospects.

Meanwhile, the increased strategic focus in Asia, from where the bank already derives around 60% of profits, underlines not only its historic presence in the region but also its aspirations of future growth.

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The net bad debt release of $700 million in the quarter compares to a charge of $800 million the year before, giving an immediate turbocharge to profits. Meanwhile, the capital cushion has increased from the previous quarter now to stand at a comfortable 15.9%, while the cost/income ratio has also marginally improved to 66.5%. Net Interest Margin is virtually unchanged, still penned in by historically low interest rates, but the liquidity pool and coverage ratio remain sizeable and sufficient.

Pre-tax profit has seen a sharp increase from $3.1 billion to $5.4 billion, ahead of expectations, with all regions currently profitable and with mortgage balances showing an uplift given continuing consumer interest in the housing market.

Less positively, the Return on Tangible Equity number is shy of the bank’s 10% target at 8.7%, lending balances are down by $20 billion and adjusted revenues have also dipped by 1%, partly due to a lower contribution from its Markets and Securities Services Unit.

The strategic move away from retail operations in the US and France towards further Asian focus is generally seen as a positive move, although the ongoing fractious relationship between the US and China and slowing growth in the region are areas of general concern.

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Even so, HSBC has indicated that it has weathered the storm and that the worst is behind it. Quite apart from a share buyback programme of up to $2 billion, the current dividend yield of 3.7% is an equal show of confidence in prospects as well as effectively paying shareholders to wait while the next leg of growth is sought.

The shares have also seen the benefit of the improvement in the bank’s fortunes, having risen by 42% over the last year, as compared to a rise of 23% for the wider FTSE100. The bank’s sprawling size and diversification can hamper growth, while still bringing comfort in more difficult times, and with prospects currently brightening the market consensus has recently improved to a “buy”.