ii view: HSBC accelerates dividend payout plans

Down by around a fifth since pandemic lows in March 2020, we assess its prospects.

First-half results to 30 June 2021

• Reported revenue down 4% to $25.6 billion (£18.4 billion)
• Profit before tax up 151% to $10.84 billion (£7.8 billion)
• Interim dividend of 7 US cents per share
• Capital cushion or CET1 ratio of 15.6%, up from 15% in H1 2020

Chief executive Noel Quinn said:

"These are good results that reflect the return of growth in our main markets and marked progress in the execution of our strategy. We were profitable in every region in the first half of the year, supported by the release of expected credit loss provisions. This performance enables us to pay an interim dividend for the first six months of 2021.

“I'm pleased with the momentum generated around our growth and transformation plans, with good delivery against all four pillars of our strategy. In particular, we have taken firm steps to define the future of our US and continental Europe businesses, and further enhanced our global Wealth capabilities.”

ii round-up:

Global bank HSBC (LSE:HSBA) today reported a more than doubling in first-half profits as economies worldwide continued to recover from the Covid-19 pandemic. 

Pre-tax profit of $10.84 billion (£7.8 billion) for the six months to the end of June surpassed analyst forecasts nearer to $9.5 billion. The bank also declared an interim dividend of 7 US cents per share, with management confidence in the recovering outlook allowing it to bring forward a targeted dividend payout ratio of between 40% to 55% of earnings from 2022 to 2021. 

HSBC shares rose by more than 1% in UK trading having fallen by around 18% since pandemic market lows back in March 2020. Shares for fellow Asian focused Standard Chartered (LSE:STAN) are up under 5%, while shares for Lloyds (LSE:LLOY) and Barclays (LSE:BARC) are up by around 51% and 110% respectively.  

Brokers Morgan Stanley and UBS now estimate full-year dividend yields of over 4% for 2022. A clearer outlook for credit quality and excess capital at the bank are expected to fund the increased payout. A possible share buyback programme of around $2 billion for 2022 is also forecast by Morgan Stanley.

Economic recovery across its geographical regions allowed it to write back bad debt provisions of $719 million previously taken, aiding the profit recovery. 

Revenues at HSBC fell by 4% to $25.6 billion, hurt by both lower interest rates and a lack of exposure to M&A and IPO activity compared to rival banks such as JPMorgan (NYSE:JPM). 

ii view:

Founded in 1865 in Hong Kong and now headquartered in London, HSBC serves more than 40 million customers in over 60 countries worldwide. It operates across the three arenas of Wealth and Personal Banking, Commercial Banking and Global Banking and Markets.  

Like fellow banks such as NatWest (LSE:NWG) and Citigroup (NYSE:C), HSBC was able to report a writing back of previously made pandemic related bad debt provisions.

More broadly, transformation plans continue to be pursed. In the US, it has now agreed to sell its mass market retail business. It has also agreed to sell its retail banking activities in France. Following the pandemic, it now plans to reduce its global office footprint by more than 3.6 million square feet or around 20%. 

For investors, geopolitics and the now more challenged relation between China and the USA offer caution. Asia accounts for around 65% of overall profit, a region which China now has significant influence over. Falling revenues and the lack of exposure to certain markets such as M&A activity which other banks offer also generates caution.

That said, a discounted valuation, a transition programme refocusing its businesses towards its areas of strength and an estimated dividend yield of over 4% going forward all add to the positives. In all, despite continued risks, we believe HSBC remains worthy of investor support.   

Positives: 

• Transformation plan being pursued
• Growing shareholder returns 

Negatives:

• Reported revenue down 5%
• Persisting political tensions between the West and China

The average rating of stock market analysts:

‘Hold’