Will HSBC's profits boom keep investors happy?

Profits at the Far East focused bank have rocketed, but the share price has outperformed over the past year. Our head of markets explains what's driving the business and what the City thinks.

The underwhelming reaction to HSBC's (LSE:HSBA) numbers in Hong Kong overnight has carried over to the UK in early trade, as profits rose sharply but remained shy of expectations.

The pre-tax profit number of $18.9 billion was a significant improvement on the $8.8 billion achieved the previous year, but market estimates had put the figure at $19.1 billion. Driven largely by a release of credit impairments as expected, the breadth and depth of the bank’s global footprint played its role once more in underwriting growth.

There are some niggles within the release, aside from the headline profit figure. Adjusted revenues fell by 3%, in part due to a weaker showing from the Markets & Securities trading arm, the cost/income ratio nudged higher to 69.9% from 68.3% and the Net Interest Margin declined to 1.2% from 1.32%.

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In terms of the outlook, HSBC is also signalling a weak opening quarter to this year from the Wealth business in its Asian operations. Similarly, the bank is targeting generally flat operating expenses in the coming period, despite the undoubted challenges which inflationary pressures are presenting.

Even so, the strength and stability of the bank has also been underlined within a generally improving economic environment. The capital cushion, or CET1 ratio, remains at a robust 15.8%, while the Net Interest Income figure of $26.5 billion is slightly ahead of expectations. Indeed, the bank is optimistic on this line in particular, expecting that gradually rising interest rates will improve the figure and bolster the Return on Tangible Equity metric to the 10% it is targeting, as opposed to the current level of 8.3%.

At the same time, there has been progress within mortgage balances and fee income growth, while the UK unit has also noticeably bounced back to a comfortable profit.

The credit impairment release of $928 million compared to a charge the previous year of $8.8 billion and was therefore a key driver overall. The bank did add a note of caution in extending an impairment provision of $450 million towards the embattled Chinese commercial real estate sector, but the general direction of travel is positive, with the bank still holding provisions of around $600 million in reserve.

Such financial largesse has also enabled further returns to shareholders. Supportive to the share price, the bank announced a buyback programme of $2 billion at the third quarter, and now intends to follow up with a further $1 billion buyback when the initial scheme has completed. At the same time, an increase to the dividend gives a projected yield of 3.3% which may not compare with the heights of over 8% pre-pandemic, but nonetheless is a generous enough yield in the current environment and also leaves the door open to further incremental increases.

Strategically, the bank has also made progress, including in the Asian region from where it currently derives some 64% of profits. Further sharp focus and investment in China, particularly relating to its wealth business, has been complemented by acquisitions in India and Singapore to accelerate its wealth capabilities further across Asia. At the same time, the move away from retail operations in France and the US was resolved, and the bank is now keen to invest further overall, with a strong slant towards digital development.

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Overall, the news is positive at HSBC. The sheer scale of the bank may have hampered agile growth in the past, but is currently of interest to investors who have been riding the wave away from growth stocks into value.

Indeed, the shares have had a good run of late and have risen 29% over the last year compared to a gain of 13% for the wider FTSE100 index. This outperformance has shaved some of the optimism from current prospects, but on balance the market consensus remains positive with the shares coming in at a "cautious buy".