HSBC has pledged to restore its dividend to pre-pandemic levels as soon as possible, as Europe’s biggest bank pushes back against pressure from its largest shareholder Ping An to divide its Asian and western operations.
The UK-based lender reported pretax profit of $5 billion in the second quarter, beating analyst estimates of $3.9 billion, as rising interest rates around the world boosted lending margins, according to a filing on Monday. However, profit fell slightly short of the $5.1 billion it generated in the same period last year.
The improved performance allowed it to promise to restore the dividend to “pre-Covid-19 levels as soon as possible” after it was cancelled during the pandemic, then restored at only half its previous level last year, angering shareholders. Shares rose 6.6 per cent in London.
HSBC is battling a public campaign from Ping An, which owns about 9.2 per cent of its shares, to spin off its Asia business and list in Hong Kong. The Chinese insurance group has been critical of years of disappointing earnings at the sprawling global lender and has argued that geopolitical tensions will soon make its position straddling east and west untenable.
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“The business itself had not been performing for 10 years and it was important to address that underperformance ... we ourselves were not happy with it,” chief executive Noel Quinn told the Financial Times.
When asked if the bank was concerned that Ping An’s campaign was politically motivated and driven from Beijing, Quinn said: “We do not believe the issues with Ping An are anything but commercial ... we know how important performance and dividends are to shareholders”.
Beijing has been increasing its control over Hong Kong, where HSBC is the city’s largest retail bank.
Armed with an encouraging quarterly performance, HSBC’s top executives hope to appease disaffected retail shareholders at a crunch meeting in Hong Kong on Tuesday.
Smaller shareholders own about a third of the stock and were enraged by the Bank of England’s decision to prevent UK lenders from paying dividends during the pandemic as part of emergency measures to improve the resilience of the sector. It lifted the ban in July 2021.
The cancelled dividend was one of the crucial reasons behind Ping An’s call for HSBC to be broken up. It has called for the bank to base its Asia operations in Hong Kong, which would put it out of the reach of the UK central bank. HSBC has hired Goldman Sachs and boutique advisory group Robey Warshaw to come up with a detailed defence strategy.
Reported revenue was $12.8 billion in the second quarter, which was in line with analyst expectations, and about 2 per cent higher than the same period last year.
The main factor driving earnings are rising global interest rates, a trend set to continue this week when the Bank of England is expected to increase rates by another 50 basis points.
HSBC said on Monday that every 100 basis point increase should add $4.7 billion to its net interest income (NII), a measure of the difference between what a bank pays for deposits and charges for loans. This means it expects to generate $3 billion of NII this year — compared with $26.5 billion in 2021 — and rising to $37 billion in 2023.
After upgrades to the earnings outlook and lower than expected loan losses, “the stock should respond positively,” said Citigroup analyst Yafei Tian. Going forward, “the focus will likely to be the uncertainties in the guidance from changing interest rate environment”.
It also received a boost from its investment bank, where trading revenues jumped 27 per cent in volatile markets, in particular foreign exchange, which was up 66 per cent in the quarter.
HSBC said it would pay an interim dividend of 9 cents a share and pledged to resume paying quarterly dividends in 2023, but warned that share buybacks were unlikely this year.
It also raised its return on tangible equity goal to at least 12 per cent from 2023 in a sign of growing confidence that it can sustainably increase profitability as the era of ultra-low rates comes to an end.
The bank said its estimated credit losses were at a “more normalised” level compared with the Covid-19 releases last year, which helped drive up earnings, and had been affected by the Russian invasion of Ukraine.
Chief financial officer Ewen Stevenson said that higher revenues “more than offsets any inflationary pressure in the cost structure ... even if you take another $1 billion of credit losses” because of the global cost of living crisis.
However, it set aside $400 million of loan-loss reserves in the quarter to account for heightened economic uncertainty. That included $142 million of provisions related to Chinese commercial real estate, on top of a $160 million charge in the first quarter, with the nation’s overleveraged property sector in crisis since the default of Evergrande. – Copyright The Financial Times Limited 2022
