Better-than-expected results go some way to justifying a share price at 2019 levels and which has more than doubled since pandemic lows. Our head of markets runs through the bank's numbers.
HSBC Holdings (LSE:HSBA)’ sheer scale and financial strength continue to ease the costs of its transformation to a more Asian-focused bank, while retaining a global presence in those regions which meet its targets.
Following its exit from the US mass market business, the French retail and Canadian businesses are now heading for the door. At the same time, the group is investing heavily in technology with the future in mind, resulting in a move towards digitisation which already boasts 13 million active users across 24 markets of its mobile banking app.
Technology investment has increased by 19% since pre-pandemic and, the payback will be accelerated as the bank recognises both the move towards a hybrid working model and this increased use of technology as it shrinks its office space and branch network.
Set against this significant change, HSBC is also navigating some economically choppy waters. The weakness in the Chinese commercial property sector is a major driver towards a full-year credit impairment figure of $3.6 billion, which compares to a release of $900 million the year previous. Alongside a further provision of $2.4 billion relating to the sale of the French business, the top-line figures are inevitably skewed.
Annual pre-tax profit fell by 7.3% to $17.53 billion, although the number was slightly ahead of expectations. More promisingly, the strength of the underlying business was demonstrated by a rise in profit after tax from $14.7 billion to $16.7 billion. Revenues increased by 4% to $51.7 billion, adjusted revenues grew by 18% and net operating income rose from $49.55 billion to $51.73 billion.
The key metrics for the most part demonstrate the tailwind of higher interest rates, while the group has also been keeping a close eye on operating costs. Net Interest Income rose to $32.6 billion from $26.5 billion, much in line with expectations, while the group estimates a figure of $36 billion for this year. Net Interest Margin stands at 1.48% from 1.2%, the capital cushion is comfortably in the target range at 14.2% and the cost/income ratio has also improved to 64.4% from 69.9%.
There is some work to do on the Return on Tangible Equity line, where a figure of 9.9% shows progress against the previous level of 8.3%, but remains shy of the bank’s 12% target.
The lack of a share buyback programme was largely anticipated, although a pleasant surprise came in the form of the group suggesting that a payment may be possible in the first quarter of the new financial year. In the meantime, an increase to the dividend leads to a yield of 4.3%, which is generous enough in the current interest rate environment. HSBC has also revealed that it will consider the payment of an additional, special dividend on the completion of the $10.1 billion sale of the Canadian business, although such a payment might spill over to next year.
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Unlike some of its competitors, the fourth quarter numbers were well ahead of estimates. Net profit of $4.62 billion was up from $1.79 billion a year previous, and well in excess of the $3.4 billion consensus. Operating income also grew by 24%, providing the bank with strong momentum as it continues its strategy pivot towards Asia. At the same time, other parts of its global operations also made their mark, with strong performances from the UK, India, Mexico and the Middle East.
For a bank of HSBC’s size, the challenges of the transformation cannot be underestimated. Equally, there are economic difficulties arising in many of its main markets, while geopolitical tensions remain a concern in the Asian region. By the same token, however, should the expected Chinese economic recovery gain full traction this year, HSBC would be a clear beneficiary.
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The share price has reflected investor optimism on the group’s strategy, having risen by 14% over the last year, as compared to a hike of 7% for the wider FTSE100, and including a jump of 30% over the last three months.
A marginal element of profit-taking has been witnessed in early trade, but HSBC is a group to monitor for the long term. Indeed, the market consensus of the shares as a 'buy' is likely to be consolidated by HSBC’s evident progress.
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