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(Alliance News) - HSBC Holdings PLC on Tuesday reported a sharp drop in third quarter profit, but was "pleased" with significantly reducing its credit losses and is considering a "conservative" shareholder payout in 2020.
In the three months to September 30, the Asia-focused lender's pretax profit dropped 37% year on year to USD3.07 billion from USD4.84 billion.
Revenue fell 11% to USD11.93 billion from USD13.36 billion.
"Reported revenue fell mainly from the impact of lower interest rates on our deposit franchises, and lower share of profit from our associate Saudi British Bank, reflecting our share of an impairment of the goodwill it recognised on the completion of the merger with Alawwal bank in 2019," HSBC explained.
This was partly offset by a fall in operating expenses to USD8.04 billion from USD8.15 billion and a reduction in expected credit losses to USD785 million from USD883 million the year before. HSBC also noted its third quarter expected credit losses is sharply below the previous quarter's USD3.83 billion hit.
Chief Executive Noel Quinn said: "These were promising results against a backdrop of the continuing impacts of Covid-19 on the global economy. I'm pleased with the significantly lower credit losses in the quarter, and we are moving at pace to adapt our business model to a protracted low interest rate environment. We are accelerating the transformation of the group, moving our focus from interest-rate sensitive business lines towards fee-generating businesses, and further reducing our operating costs. We also intend to increase our rate of investment in Asia, particularly in wealth, the Greater Bay Area, south Asia, trade finance and sustainable finance."
HSBC net interest margin worsened to 1.20% in the third quarter from 1.56% the year before and was down from 1.33% in the previous quarter.
The lender said: "Central banks have reduced interest rates in most financial markets due to the adverse impact on the timelines and the path for economic recovery from the Covid-19 outbreak, which has in turn increased the likelihood of negative interest rates. This raises a number of risks and concerns, such as the readiness of our systems and processes to accommodate zero or negative rates, the resulting impacts on customers, regulatory constraints and the financial implications given the significant impact that prolonged low interest rates are likely to have on our net interest income."
HSBC's customer loan book ended the quarter at USD1.041 trillion compared to USD1.014 trillion the year before. Customer deposits rose to USD1.569 trillion from USD1.374 trillion the year before.
Geographically, the lender improved to a small pretax profit in Europe of USD84 million versus a USD424 million loss the year before. In the Middle East & North Africa, HSBC slipped to a loss of USD300 million compared to a USD305 million profit the year before, while it slipped to a USD7 million loss in North America from a USD299 million profit the year before. In Latin America, HSBC's profit jumped to USD110 million from USD6 million.
In Asia - HSBC's core market - profit slipped to USD3.19 billion from USD4.65 billion.
HSBC noted none of its units recorded growth in the third quarter. The Wealth & Personal Banking unit saw profit slip to USD1.43 billion from USD1.97 billion the year before, Commercial Banking profit fell to USD1.18 billion from USD1.63 billion, while Global Banking & Markets saw profit largely flat at USD1.23 billion.
Quinn added: "The group's capital and liquidity ratios strengthened further in the quarter despite the challenging economic conditions. A decision on whether to pay a dividend for the 2020 financial year will depend on economic conditions in early 2021, and be subject to regulatory consultation. We will seek to pay a conservative dividend if circumstances allow."
HSBC's CET1 ratio at the end of the third quarter stood at 15.6%, up from 15.0% at the end of June, and from 14.7% at December 31.
Looking ahead, the lender expects lower global interest rates wil continue to put pressure on its net interest income. Based on current interest rates, its expects further net interest income headwinds in the fourth quarter, with some stabilisation as it moves into 2021.
HSBC also noted its expected credit losses for 2020 is trending towards to lower end of its USD8 billion to USD13 billion guided range. The bank said this remains a "high degree of uncertainty", however.
The lender is also looking to accelerate its transformation due to "significant changes in the operating environment".
It expects to reduce its 2022 annual cost base beyond its original USD31 billion target, and also exceed its target to reduce risk-weighted assets by USD100 billion.
"This is expected to allow more resources to be allocated to areas of competitive advantage, higher returns and growth. We are finalising our work on costs, capital and RWA deployment and intend to provide a more detailed and updated transformation plan with our full-year results in February 2021," HSBC said.
The bank said it is continuing with the strategic review of its retail banking operations in France, and noted its US management team is "making good progress in executing the current business plan at pace".
Shares in HSBC closed at 319.35 pence each in London on Monday. The shares were up 1.9% in Hong Kong on Tuesday.
By Paul McGowan; paulmcgowan@alliancenews.com
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