By Steve Slater
LONDON, Aug 3 (IFR) - HSBC has kicked off its first sharebuyback with plans to repurchase US$2.5bn of stock this year,thanks to capital from the sale of its Brazilian business.
It said it could buy back a similar amount of stock nextyear, because it is being allowed to pull back surplus cash fromits US business for the first time in a decade.
HSBC also said it will keep its dividend at its currentlevel "for the foreseeable future", which gave comfort toinvestors in Europe's biggest bank and lifted its shares,despite a 45% slump in second-quarter profits.
Pre-tax profits in the three months to June 30 wereUS$3.61bn compared with US$6.57bn a year ago. That left profitsfor the first-half at US$9.71bn, down 29% from the first sixmonths of 2015.
Profits in global banking and markets in the second quarterrose 10% from a year ago to US$1.89bn. For the half-year, GBM'sprofits fell 16% to US$4.01bn, hurt by a 46% slump in equitiesrevenues.
HSBC's shares rose 3.7% by midday as investors were cheeredby the buyback.
"As the announced buyback has been approved by the PRA webelieve this is a positive vote of confidence from the UKregulator on HSBC's ability to generate capital and manage anychange in regulatory requirements," said Ronit Ghose, analyst atCitigroup.
The buyback marks a significant shift for HSBC.
It and other banks have been building capital over the lastdecade to meet tougher capital rules, but even before thefinancial crisis HSBC did not buy back shares - it preferred tospend surplus cash on acquisitions.
CEO Stuart Gulliver has reversed that strategy and sold 88businesses since taking over at the start of 2011.
That included the sale of HSBC Bank Brazil last month forUS$5.2bn.
It also sold its US credit card business in 2013 and halfits US bank branches, which left it with surplus cash in the US.Regulators have not allowed it to return that surplus until now.
The US Federal Reserve has given permission to pay adividend in 2017, its first since 2007. The bank said that alsoreflected its success in running down US sub-prime loans andrestructuring its US business.
HSBC declined to say how much the US dividend will be, butsaid it could underpin a possible second buyback.
"We don't yet know what the size of that would be, but youshould assume it would be somewhere in the same range as the onewe're doing now to make it worthwhile," Gulliver said.
He said the bank was not introducing a rolling buybackprogramme, but will make one-off decisions.
"Where there is a one-off type event, like when we've sold abusiness, and we no longer need the shares that supported thatbusiness, we will consider buying back those shares."
Gulliver said the bank's long-standing "progressive"dividend policy has been scrapped, but it would not cut thepayout as some investors had feared.
"That (progressive) is no longer the dividend policy of thefirm, but what we will do is set out a commitment to sustain theannual ordinary dividend at current levels for the foreseeablefuture," he told reporters on a conference call.
The full-year dividend will be held at US$0.51 a share,offering a yield of 7.5% a year.
EQUITIES SLIDE
GBM's net operating income in the first half was down 13%from a year ago to US$8.9bn, dragged down by equities, whererevenues fell to US$575m from US$1.07bn a year ago. All bankshave had a bad year in equities as clients reduced activity amidvolatile markets.
Its foreign exchange revenues in the first half fell 6% froma year ago to US$1.49bn and banking revenues dropped 2% toUS$1.78bn. But rates revenues rose 16% to US$1.12bn and creditrevenues increased 6% to US$506m.
"I don't think we have a structural problem with ourequities business at all, so we don't need to do any particularchanges to it. Credit and rates did well, cash and liquiditymanagement did well, so the business is well diversified andresilient," Gulliver said.
HSBC is shrinking the size of GBM as part of its plan toreduce the capital it needs and improve returns. GBM'srisk-weighted assets were US$437bn at the end of June, down byUS$15bn in the second quarter and by US$54bn in the past year. (Reporting by Steve Slater)
HSBC Holdings (HSBA)