HSBC shares slump again after Q3 results: what went wrong?

While there are many hits in evidence, the misses in HSBC Holdings (LSE:HSBA)'s third-quarter results have taken centre stage, with the Wealth business finding itself the focus of attention.

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After revenue growth of 15% and 23% for the first two quarters, the number fell by 3% in the latest period. This led to a decline of 14% in pre-tax profit to $1.1 billion, stopping recent progress in its tracks. The wider concern is that the group has been pushing towards the affluent sector and, while the year-to-date profit number remains ahead by 9% at $3.7 billion, it remains to be seen whether this is the beginning of a trend.

This also undermines, at least temporarily, the group’s aspirations for the unit. Whereas HSBC had been moving towards becoming a business with a slavish reliance on interest rate movements and levels, the revised and increasing focus on the growth in affluent wealth, especially in Asia, is key to the new offering.

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The company has been investing heavily in this move, giving HSBC higher but more diversified income streams. Apart from the longer-term potential for the key Chinese market, the group previously identified areas such as India and Vietnam as being some of the fastest growing economies at present.

Despite this shock, there is little of concern elsewhere as the numbers simply stack up. The strength and diversity of the business is more than sufficient to pick up the Wealth slack, with its other units clearly in rude health.

The Hong Kong business posted a pre-tax profit rise of 8% to $2.6 billion, Corporate and Institutional Banking rose by 34% to $3.6 billion, and the UK leapt 19% to $1.8 billion. As such, overall pre-tax profit rose by 32% to $9.63 billion, while net profit jumped by 45% to $7.09 billion, albeit shy of the $7.24 billion which had been pencilled in by the market.

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There is also some improvement filtering through in terms of expected credit losses, which were down from $1 billion to $800 million this quarter, with provisions declining by a similar factor. As has been the case for many other global banks, the impact of the Middle East conflict has made an appearance in the numbers. HSBC has exposure to the region, let alone the broader economic impacts, and has modelled scenarios of increasing severity and duration which could lead to higher oil prices and inflation, slowing GDP growth and rising unemployment.

Even so, the numbers more broadly have been boosted by the non-recurrence of figures which blighted results last year, such as a $2.1 billion charge for losses related to its Chinese Bank of Communications stake and $1.4 billion of legal provisions contributed, with the commercial real estate situation in Hong Kong and mainland China remaining difficult.

The key metrics were mixed, but mainly positive nonetheless. Return on Tangible Equity (ROTE) rose from 12.3% to 17.7%, while Net Interest Income (NII) grew by 6% to $9.31 billion, driven by deposit growth, foreign exchange tailwinds and the benefit of structural hedge income. Banking NII was slightly down, however, and it appears that investors were expecting more from NII as a whole.

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Elsewhere, and despite the drag of the provisions, the cost/income ratio fell to 47.4% from 56.6% previously, with the CET1 ratio, or capital cushion, falling to 13.9% from 14.1%, still easily in reach of the group’s 14% to 14.5% target range. Lending and deposit balances also rose, and the group announced a new target of $2 billion of cost savings for the year, having surpassed the previous $1.5 billion aim with six months to spare.

Guidance is unchanged, with the group expecting ROTE to exceed 17% for the full year, and NII to be at least $46 billion, although some investors may now question the more ambitious targets in following years. The general strength led to the dividend being maintained, protecting the current generous yield of 4.1%, while a further share buyback programme of $1 billion should lend some support to the share price in due course.

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However, the Wealth shock, a net profit shy of expectations and a weaker wider market have led to a toxic mix in early trade. Prior to the near 7% dip at the start of trade Tuesday, the shares had risen by 36% over the last year, as compared to a gain of 11.5% for the wider FTSE100, and by 100% over the last two years. This in part explains the higher expectations which HSBC now attracts and the severity of the reaction when negative surprises surface.

Even before this update, the market consensus of the shares as a hold reflected a belief that there could be safer opportunities elsewhere in the sector, and this seems unlikely to change even though the longer term financial muscle of the group remains in clear evidence.