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(Alliance News) - HSBC Holdings PLC on Tuesday showed off a "good start" to 2021 with quarterly profit sharply higher - boosted by credit releases - but left shareholders wanting more from its strategic review.
The bank said it expects to update shareholders on the progress of its new strategic plan in August, in the release of its interim results, but said Tuesday it is confident its new direction and focus will lead to revenue growth.
Shares in HSBC were trading 2.5% higher at 433.20 pence each in London on Tuesday morning, the best performing blue-chip stock. HSBC shares closed up 2.0% in Hong Kong.
Richard Hunter, head of markets at interactive investor, said: "HSBC will not transform its fortunes overnight, but the improving economic outlook has provided a welcome boost to its aspirations."
The Asia-focused lender said it is not planning quarterly dividends in 2021 but said it may consider an interim dividend. HSBC paid a USD0.15 per share dividend for 2020, declared as an interim payout with its full year results in February.
Pretax profit in the three months to March 31 improved 79% to USD5.78 billion from USD3.23 billion the year before. In the first quarter, HSBC's expected credit losses came out as a net release of USD400 million compared to the mammoth USD3.0 billion charge seen a year before.
The net release in provisions primarily reflected an improvement in the economic outlook from 2020, the bank explained.
"In particular, the release of USD400 million of impairments is sign of optimism, especially in the UK where the situation has markedly improved from the perspective of poor performing loans. At the same time, the investment banking unit has continued to benefit from market volatility and fund raising, the Wealth business saw a 3% growth of balances taking the figure to GBP1.6 trillion in the quarter, while overall the bank has reported that each of its regions were profitable for the quarter, already a far cry from the tribulations of 2020," interactive investor's Hunter continued.
The bank reported growth from all regions, with Asia profit growing slightly to USD3.76 billion but European and North American operations swinging to profit from a loss a year before.
In Europe, HSBC recorded a profit of USD997 million compared to a USD511 million loss a year before, while North America swung to a USD484 million profit from a USD111 million loss.
Middle East & North Africa profit improved markedly to USD337 million from USD44 million, while Latin America profit rose to USD203 million from USD67 million.
Group revenue was down 5.1% to USD12.99 billion from USD13.69 billion as the lender's net interest margin slipped to 1.21% from 1.54%.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said: "HSBC swallowed a bitter pill by setting aside USD3 billion for bad loans provisions last year, but now the pandemic headache is easing, it's releasing USD400 million of that cash. The improved economic outlook, thanks to rapid vaccine rolls outs, helped by the crutch of government emergency support, is welcome relief for the bank, helping push up profits by 79%.
"HSBC UK was singled out for a particularly strong recovery with pre-tax profits of over USD1 billion for the quarter, with expected credit losses staging a disappearing act, as a strong economic bounce back appears on the cards. Demand for mortgages in the UK as the house price boom continues was one of the drivers which helped push up lending over the quarter by USD2 billion."
Within units, HSBC's Wealth & Personal Banking business saw adjusted profit grow sharply to USD1.91 billion from USD688 million.
The Wealth business saw Investment Distribution net operating income rise 14% - attributed to strong equity market conditions in Hong Kong boosting brokerage fees on higher volumes - which offset an 8% slip in income in Global Private Banking. Personal Banking income was down 23%, holding back the growth from the Wealth side of the unit, hurt by lower global interest rates.
Turning to Commercial Banking, profit rose to USD1.81 billion from USD673 million. Global Trade & Receivables Finance net operating income was down 6% and Global Liquidity & Cash Management income was down 36%, which was offset by 2% growth in Credit & Lending - reflecting growth in average balances driven by the uptake of government-backed lending schemes.
Global Banking & Markets adjusted profit improved to USD1.94 billion from USD874 million. Within the unit, Markets & Securities Services net operating income grew 6%, offsetting a 9% fall in Banking.
"In Markets and Securities Services, revenue increased by USD100 million, or 6% due to favourable movements in credit and funding valuation adjustments of USD400 million and as 1Q20 included a USD310 million adverse bid-offer adjustment. Revenue in Global Debt Markets & Equities increased, particularly in wealth and private credit, reflecting robust client activity. These increases more than offset lower revenue in Global Foreign Exchange, which was in the context of a particularly strong performance in 1Q20. Securities Services revenue fell by USD100 million or 14% due to lower interest rates, notably in Asia and Europe, while fees were up 6%, mainly in Asia," HSBC explained.
Despite the better-than-expected topline figures, Hargreaves Lansdown's Streeter is concerned about HSBC's "underlying ailment", the "ultra-low rates plaguing the banking sector".
"HSBC is not alone in feeling the squeeze of net interest margins, which tightened again slightly over the quarter, but other banks with huge investment banking arms have been able to capitalise on the trading surge over the past year," Streeter added.
ii's Hunter also noted "much remains to be done", pointing out the bank's "transformation programme which has yet to land."
"Further risks are evident, with varying geopolitical tensions in its core Asian region, which accounts for 65% of profits on these numbers, a particular concern. The likelihood that different parts of the world will emerge from the pandemic at different speeds and over different times is another potential headwind, while the fact that there are still a number of payment holidays for the bank to consider add to a difficult credit mix," Hunter added.
HSBC's cost efficiency ratio worsened to 65.7% from 57.4%.
The bank ended the first quarter with a CET1 ratio of 15.9%, which is up from 14.6% at the same point a year earlier and unchanged from the end of 2020.
Chief Executive Noel Quinn said: "We had a good start to the year in support of our customers, while achieving materially enhanced returns for our shareholders. I am pleased with our revenue and cost performance, but particularly with our significantly lower expected credit losses. Global Banking and Markets had a good quarter, and we saw solid business growth in strategic areas, including Asia Wealth and trade finance, and mortgages in Hong Kong and the UK. We also strengthened our lending pipelines in our retail and wholesale businesses."
HSBC's loan book ended March at USD1.040 trillion, flat on the year before, but did improve from the end of 2020 - boosted by growth in Wealth & Personal Banking, notably mortgages in the UK and Hong Kong, and in Commercial Banking in areas of strategic focus.
Customer accounts rose to USD1.650 trillion from USD1.440 trillion.
"The execution of our growth and transformation plans is proceeding well. We made further progress in reducing both costs and risk-weighted assets, and launched new products and capabilities in areas of strength," Quinn continued.
Looking ahead, HSBC said the economic outlook has improved, giving it increased confidence in its revenue growth plans. It expects mid-single-digit percentage growth in customer lending during 2021.
Streeter said: "It's planning further expansion for its investment banking business, to try and sniff out higher returns, by moving capital investment and staff from Europe and the US to Asia. As part of the refocus it's still attempting to extricate itself from the struggling French retail banking arm, and is still deep in negotiations. Nonetheless, the bank notes that the outlook remains highly uncertain. HSBC's resilience could be tested as governments remove the arms of support that have been wrapped around their economies to help them limp through the crisis."
Based on current consensus economic forecasts, HSBC guided for the expected credit losses charge for 2021 to be below the medium-term range of 30 basis points to 40 basis points of average loans.
Quinn added: "The economic outlook has improved, although uncertainties remain. We carry good momentum into the second quarter, while maintaining conservative positions on capital, funding, liquidity and credit."
By Paul McGowan; paulmcgowan@alliancenews.com
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