HSBC shares rise as Georges Elhedery’s pivot East beats the noise
HSBC’s pass through the third quarter was almost identical to the second.
Despite another hefty hit to the firm’s bottom line, chief executive Georges Elhedery has quietly and effectively pushed ahead with his bold overhaul of the group.
For the three months to September 30, HSBC took a 14 per cent profit beat falling to $7.3bn (£5.4bn)
The fall came as the bank hiked legal provisions after a fresh ruling in the Madoff fraud scandal put the lender on the hook for $1.1bn (£830m).
But beyond the noise, revenue breezed past expectations by $800m to hit nearly $18bn.
“HSBC’s latest results follow a familiar pattern: strong underlying performance undermined by exceptional items,” Chris Beauchamp, chief market analyst at IG, told Morning Wire.
“Strip out the legal hit and pre-tax profit would have grown, with wealth management and Asian franchises continuing to deliver.”
Wealth has been the consistent outperformer across the banking juggernaut and it’s an area Elhedery has bet on extensively.
Fee income in Hong Kong’s wealth division alone grew 61 per cent in the quarter to $646m after a bump from insurance and investment.
The group’s annual average growth in fee and other income in wealth is forecast to be in the double digits.
Elhedery has put focus on the division as part of plans to double the bank’s assets under management to £100bn in the next five years.
In London, the bank has splashed $5m on a new wealth headquarters to capture the mass-affluent consumer base.
“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,” said Richard Hunter, head of markets at interactive investor.
A future in Asia and Middle East
However, growth is being driven not only by strategic divisions but also by geographic targets.
Beauchamp said UK business looked “softer” with an acceleration in costs compared to revenue and margins “squeezed by competitive mortgage pricing”.
The UK business looks softer, with costs climbing faster than revenues and margins squeezed by competitive mortgage pricing.
In its ring-fenced UK bank, revenue edged up to $3.6bn from $3.4bn in the previous quarter, a 3.7 per cent increase.
Meanwhile operating expenses jumped to $3.4bn – a 6.9 per cent surge.
Pre-tax profit fell to £1.8bn from just over £1.9bn in the second quarter.
“HSBC’s strategy now clearly rests on Asia and the Middle East, with Hong Kong and Singapore remaining its profit engines.
“The bank has effectively abandoned the old universal-bank model in the West, shutting M&A and equity underwriting units to free capital for higher-growth Asian and Gulf markets,” Beauchamp said.
The bank has culled its investment banking arm in the West as part of a redrawal from European operations.
Morning Wire revealed earlier this year that UK investment bankers were set to face the chop the same day pencilled in for bonuses.
But finance boss Pam Kaur said following the group’s third quarter results the UK “home market” was “core to our business”.
“We will continue to invest in the UK, both organically, and if there is the right opportunity… for acquisition, then of course, we will be open to that as well,” Kaur said.
Kaur added the group’s loan book growth in the UK showed “investment and focus in the UK is paying”.
“We are absolutely participating in the economic growth of specific sectors in the UK, like infrastructure, social housing and innovation related,” she added.
The bank has previously identified India and Vietnam as fast growing economies that could be ripe for expansion.
Hunter said: “The building of economic connections between Asia and the Middle East, notwithstanding any geopolitical conflicts, are also emerging opportunities for HSBC with its sprawling footprint.”
Markets shrug off financial hits
Investors rewarded the latest update from HSBC with a bump to the bank’s share price.
On Monday, the bank fell in early trading on the news of the $1.1bn provision but later recovered to close broadly flat.
Markets managed to shake off the news that a Luxembourg court rejected HSBC’s appeal against a Cayman Islands-based ‘feeder fund’ which claimed the bank breached its supervisory duties.
The Madoff scandal, which marked the largest investment fraud in history, used a decades-long Ponzi Scheme starting in the 1970s and promised consistent high-returns.
But, no actual trades were being executed and instead, funds from newer investors were used to pay ‘returns’ to earlier ones.
HSBC acted as a custodian and administrator to several offshore ‘feeder funds’ that invested with Bernard L. Madoff Investment securities and faced accusations that it failed to properly safeguard or verify the existence of the assets and thereby facilitating the continuation of the fraud.
It followed a $2.1bn write-down for its stake in China’s Bank of Communications in the second quarter and the move to halt its buybacks after taking control of Hong Kong lender Hang Seng.
Despite the third quarter legal blow, HSBC shares were up over four per cent by midday to 1050p. This closed in on the all-time high of 1066p netted earlier this month.
The bank’s stock is up over 30 per cent for the year-to-date.
Beauchamp said: “The market is finally rewarding HSBC’s pivot east, with the franchise looking stronger than it has in a decade.”
Elhedery said in the latest earnings report the bank was becoming a “simple, more agile, focused bank”.
Should the bank be able to get a series of simple “clean quarters” under its belt – without the headline distractions – Beauchamp anticipated room “for further gains despite the recent rally”.