Sunnier HSBC leaves something for rainy days

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A pedestrian walks past a sign showing the HSBC lion at its headquarters in the central financial district of Hong Kong, China, August 4, 2020. REUTERS / Tyrone Siu – RC207I96XPCZ

HONG KONG, Aug 2 (Reuters Breakingviews) – How long can “cautious optimism” be used to describe HSBC (HSBA.L), (0005.HK)? Request crowds of shareholders.

The UK-based bank more than doubled its first half profits from a year ago and spoke of good momentum, but capital conservation is also on the agenda. For a deposit-heavy lender in a low interest rate environment operating during a protracted global pandemic, a performance somewhere between strong and good might be all to expect. It is also unlikely to revive a valuation of 60% of book value.

HSBC’s $ 10.8 billion pre-tax profit was about $ 1 billion higher than analysts expected and generated a 9.4% return on equity. After setting aside $ 6.9 billion for bad debts anticipated in the first six months of 2020, the bank released $ 700 million this year, helping to offset a 4% drop in revenue. All regions were profitable, including Europe, which was lagging behind for a long time.

Net interest rate margins plunged 22 basis points to 1.21%, but HSBC is hoping it’s the bottom. A one percentage point increase would add $ 7 billion in revenue over two years, the bank estimates.

Paying a dividend again after the Bank of England lifted the restrictions is another good sign. Making only 7 cents a share so far, however, matches the general feeling of moving slowly in the right direction. The figure puts him on track for the lower end of the bank’s 40% to 55% payout ratio. Boss Noel Quinn will also be considering buyouts, having ruled them out in February. A senior common equity ratio of 15.6% suggests, in theory at least, about $ 18 billion in reserve funds before it drops to HSBC’s 13.5% target. Shareholders shouldn’t hold their breath.

HSBC’s 34% total return over the past year reflects the disappointing mood. That’s only slightly behind Citigroup’s 39% but well below the 70% to 90% generated by UK rivals Barclays (BARC.L) and NatWest (NWG.L), which unveiled more robust payouts last week. . For a bank making decent progress in its contraction and restructuring plans, HSBC deserves more than “meh”.

To pursue @ JennHughes13 on Twitter

NEWS CONTEXT

– HSBC said on August 2 that first-half profit before tax more than doubled to $ 10.8 billion from the same period in 2020, when it set aside $ 6.9 billion for cover bad debts expected due to the pandemic. Income in the first six months fell 4% due to significantly lower interest rates around the world.

– The bank added that it would pay an interim dividend of 7 cents per share and said it was on track to achieve a target annual payout ratio of between 40% and 55% of earnings.

– The Bank of England, HSBC’s main regulator, on July 31 lifted its remaining pandemic-related limits on bank payments. He had previously told banks to lower dividends and share buybacks to help cushion the economic impact of Covid-19, but he relaxed the rules in December to allow limited returns to shareholders.

– Barclays and Lloyds NatWest Group announced more than $ 3 billion in dividends and buybacks between them as well as first half results updates during the week of July 26.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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