HSBC profits beat forecast as Hong Kong remains strong

29th Oct 2018 07:12

(Sharecast News) - HSBC reported stronger profit growth than expected for the third quarter as all three of the bank's main businesses enjoyed good growth and progress was made with cost cutting efforts.Profit before tax for quarter of $5.9bn was 28% higher than the same quarter last year, beating the $5.6bn average analyst forecast, with adjusted PBT up 16% to $6.19bn to top the expected $5.8bn. Showing the distribution of the group's businesses, $4.5bn of adjusted profits came from Asia, up from $4bn this time last year, while Europe, including the UK, generated $0.9bn, up from $0.5bn.Profit growth was enabled by a 6.3% increase in revenues in the quarter to £13.8bn, slightly higher than expected, thanks to higher interest rates and growth in deposits, notably in Hong Kong.Profits were better than analysts expected even despite the bank taking a charge in the period "reflecting concerns over possible impacts of escalating tariffs and other trade restrictions, primarily in Hong Kong" and a $145m hit to account for hyperinflation in Argentina.Growth came from across the group's main banking activities, with retail banking revenues swelling 14% as wider margins and balance growth in current accounts, savings and deposits offset squeezed mortgage lending conditions in Hong Kong and the UK. Revenues in commercial banking were up 15%, as chief executive John Flint said the bank enjoyed the benefits of past investment to grow lending and deposit balances in both divisions. In investment banking and markets, revenues were up 10% thanks to a demand for transaction banking and foreign exchange.Over the first nine months of the year, adjusted profits are up 4% to $41.4bn, even though adjusted operating expenses are up 6% to $24.1bn due to increased investments, notably in retail banking and wealth management and investment banking.As with his predecessor, Flint is hunting positive cost-to-income 'jaws', the banking term for when revenue growth rate exceeds the rate of cost growth, while in the summer he also outlined plans to invest $15-17bn on technology and growth over three years. Adjusted jaws have improved to -1.6% after nine months of the year, from -5.6% in the first half of the year."These are encouraging results that demonstrate the revenue potential of HSBC," Flint said. "We are doing what we said we would - delivering growth from areas of strength, and investing in the business while keeping a strong grip on costs."Flint said the strong growth in revenue continued to "enable us to invest in growth and in the simplification of the organisation".The capital base improved too, with the common equity tier 1 ratio rising to 14.3% from 14.2% three months earlier, while the leverage ratio remained at 5.4%.HSBC maintained its quarterly dividend at $0.10 per share and Flint made no change to the HSBC's guidance, continuing to target positive statutory jaws for the full year and return on tangible equity of >11% by 2020, versus 10.1% reported in the year to date.MARKET REACTION & ANALYSISHSBC shares rose more than 4% to 630.1p in the first hour and a half of trading in London on Monday.Analysts at RBC Capital Markets said the $5.9bn profit was 6% above consensus expectations or 8% on an adjusted basis, driven by lower than expected operating expenses and higher than expected revenues."HSBC have a target of mid-single digit growth for revenues, low mid-single digit growth for costs and positive jaws. A lot of emphasis has been placed on this latter target by the market as an indicator of management's credibility at giving longer term guidance," RBC said, noting the improvement in the quarter and positive statements for the full year.Analyst Laith Khalaf at Hargreaves Lansdown noted that three quarters of the bank's profits so far this year have come from its Asian operations, with growth broad-based across banking activities - "what's positive is that's coming from a rising top line rather than simply cost-cutting, which can only deliver results for so long".He added: "As an international retail and commercial bank, HSBC is clearly plugged into the global economy, and in particular the fortunes of China and the surrounding area. While in the long term this looks like an ace in the sleeve, investors should expect a bumpy journey, particularly if Trump's trade war dents growth in the region."UBS said: "Though dividend accruals and buybacks have seen CET1 and leverage ratios fall slightly, concerns from some investors about HSBC's capacity to grow the balance sheet while managing RWAs for a strong all-in yield should be somewhat allayed by these numbers."The Swiss bank said the strength in the investment bank was "noteworthy given EM volatility and mixed numbers from the peer group" and improved jaws "supports the achievement of the FY18 jaws target which had come into question in the softer capital markets we've seen".