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(Alliance News) - HSBC Holdings PLC on Tuesday reported a sharp drop in profit in 2020, as the lender saw its global operations struggle to keep up with its Asian business but has offered some "cautious optimism" going forward.
For 2020, the China-focused lender saw its pretax profit drop to USD8.78 billion from USD13.35 billion in 2019. The 34% fall was blamed on higher expected credit losses and other credit impairment charges and lower revenue.
"The shutdown of much of the global economy in the first half of the year caused a large rise in expected credit losses, and cuts in central bank interest rates reduced revenue in rate-sensitive business lines. We responded by accelerating the transformation of the Group, further reducing our operating costs and moving our focus from interest rate sensitive business lines towards fee generating businesses. Our expected credit losses stabilised in the second half of the year in line with the changed economic outlook, but the revenue environment remained muted," the lender explained.
Despite the sharp drop, HSBC's pretax profit came in ahead of market consensus, which forecast the figure at USD8.33 billion.
The bank upped its expected credit losses to USD8.82 billion in 2020 from USD2.76 billion in 2019. Allowance for ECL on loans and advances to customers rose to USD14.5 billion at the end of 2020, up from USD8.7 billion at the end of 2019.
HSBC's reported revenue fell 10% year on year to USD50.43 billion from USD56.10 billion.
Net operating income plunged 21% to USD41.55 billion from USD52.31 billion, as net interest income fell 9.5% to USD27.58 billion from USD30.46 billion and net fee income slipped 1.2% to USD11.87 billion from UDS12.02 billion.
Market consensus had forecast net operating income at USD50.04 billion, while net interest income was predicted at USD27.23 billion.
The lender blamed the drop in income on the "progressive impact of lower interest rates across our global businesses."
Which in turn, squeezed its net interest margin, pushing the ratio down to 1.32% from 1.58% a year earlier.
Operating expenses were lower, dropping to USD34.43 billion from USD42.35 billion in 2019 but, owing to the drop in profit, was unable to contain its adjusted cost efficiency ratio - which worsened to 62.5% from 59.2% in 2019.
"In 2020, our people delivered an exceptional level of support for our customers in very tough circumstances, while our strong balance sheet and liquidity gave reassurance to those who rely on us. We achieved this while delivering a solid financial performance in the context of the pandemic - particularly in Asia - and laying firm foundations for our future growth. I am proud of everything our people achieved and grateful for the loyalty of our customers during a very turbulent year," Chief Executive Noel Quinn said.
HSBC ended 2020 with a CET1 ratio of 15.9%, which is up from 14.7% at the end of 2019. This capital cushion allowed the bank to declare a USD0.15 per share interim dividend for 2020.
Going forward, HSBC said it intends to maintain a CET1 ratio above 14%, in the range of 14% to 14.5% in the medium term.
"The board has adopted a policy to provide sustainable dividends going forward. We intend to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards, with the flexibility to adjust EPS for non-cash significant items, such as goodwill or intangibles impairments," HSBC added.
HSBC's loan book was stable in 2020, growing to USD1.038 trillion from USD1.037 trillion, but customer deposits shot up, rising to USD1.643 trillion from USD1.439 trillion.
Geographically, Asia continues to be HSBC's profit centre. Pretax profit in Asia fell sharply to UDS12.83 billion from USD18.47 billion, but its Europe operations recorded another loss in 2020, narrowing to USD4.21 billion from UDS4.65 billion in 2019.
Middle East & North Africa pretax profit was almost wiped out, falling to USD19 million from USD2.33 billion, while North America dropped to USD168 million from USD767 million. Finally, the lender's South America operations swung to a USD37 million loss compared to 2019's USD400 million profit.
By division, Wealth & Personal Banking pretax profit was halved to USD4.14 billion from USD8.88 billion, while Commercial Banking suffered a torrid year with profit plunging to USD1.87 billion from USD7.17 billion. Global Banking & Markets 2020 profit fell 6.6% to USD4.83 billion from USD5.17 billion.
Looking ahead, HSBC said it recognises a number of "fundamental changes", including the prospect of prolonged low interest rates, the significant increase in digital engagement from customers and the enhanced focus on the environment. As a result, the lender said it has "aligned its strategy accordingly".
It added: "We intend to increase our focus on areas where we are strongest, increase and accelerate our investments, and continue to progress with the transformation of our underperforming businesses. As part of our climate ambitions, we have also set out our plans to capture the opportunities presented by the transition to a low-carbon economy."
HSBC continues to target a drop in gross risk-weighted assets of over USD100 billion by the end of 2022, but no longer expects a return on average tangible equity between 10% and 12% in 2022, as originally planned and will now target a RoTE of greater than or equal to 10% in the medium term.
HSBC ended 202 with RWAs of USD857.53 billion and a 3.1% RoTE.
The bank noted it had a "good start" to 2021, and is "cautiously optimistic" for the year ahead.
By Paul McGowan; paulmcgowan@alliancenews.com
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