As HSBC updates the market, we explain what it means for investors
HSBC launches $2bn share buyback after disappointing results
HSBC updated the market today with disappointing news; the shares opened in London down 2.5% and had dropped further in the Hong Kong market. Reporting an increase in operating expenses by 13% at $9.4bn, the group used the increased costs mostly on investments to grow the business and into their IT platform to enhance their digital capabilities; the expenditure, however, was much higher than anticipated.
Even when excluding the negative impact of currency movements, adjusted operating expenses rose by 8%. A figure too high for some investors, these higher costs dragged reported profit before taxes down by 4% to $4.8bn. The group set aside $897m to cover “legal and regulatory matters” relating to the miss-selling of mortgage securities before the financial crisis. It has not been a great start for John Flint, the new CEO, even the announcement of a $2bn share buyback and the fact that the common equity tier 1 ratio held steady at 14.5%, was not enough to turn investors’ mood positive.
Despite all this, reported revenues were up by 6% to $13.7bn owing to higher deposit margins as dollar interest rates, particularly in Asian markets, continue to rise. As well as wider deposit margins, the group experienced increased deposit balances across its Retail Banking, Wealth Management and Commercial Banking operations. There was also a 2% increase in net loans and advances to customers. Within their Global Banking and Markets division, the rising activity levels within equities helped offset lower client activity within fixed income.
Overall, HSBC has been a good performer over the last few years, benefitting from sustained global growth, especially within their core Asian markets. The belief amongst many economists and analysts is that this global growth can be sustained for a little while longer and HSBC is in a strong position to take advantage. We believe that HSBC is one of the better organised banks listed in the UK; sporting a strong balance sheet, it is an attractive option for many income seekers and we thus maintain our ‘buy’ recommendation for investors willing to accept a medium risk. The hope is that the increased costs are a temporary issue, and ultimately the higher investments costs should position the bank well into an ever more digital world.
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