Shares in banking giant HSBC (HSBA) edged 0.7% higher to 425p despite first quarter earnings which were materially ahead of expectations, as investors focused instead on the lack of certainty over full year revenue growth and the company’s decision to eschew quarterly dividends.
EARNINGS FLATTERED
Reported pre-tax profits for the first three months were $5.8 billion, an increase of 79% on last year and well ahead of market forecasts of $3.35 billion.
However, the result was still below the equivalent quarter in 2019, when the bank reported profits of $6.21 billion. It also included a net release of $400 million of provisions for expected credit losses compared with a charge of $3 billion in last year’s first quarter.
The bank admitted it was unlikely to unwind further provisions during the year but rather charges were likely to continue due to the ‘high degree of uncertainty as countries emerge from the pandemic at different speeds and as government support measures unwind’.
MARGINS WORSE
Elsewhere, the bank’s net interest margin - a key measure of the profit it makes lending money out compared with its cost of deposits - dropped by 0.33% to just 1.21% over the quarter, reflecting continued low interest rates and sluggish loan growth.
Also, the bank’s cost to income ratio - one of the few things it should be able to control, in theory - jumped from 57.4% last year to 65.7% last quarter due to a 9% increase in reported operating costs. The bank says it is still committed to delivering cost savings of $5 billion to $5.5 billion for 2020 to 2022, but at a cost of $7 billion.
There were a few bright spots, particularly in the global business. Pre-tax profits in wealth and personal banking, commercial banking and global banking and markets were all up sharply on last year’s pandemic-impacted first quarter, although global banking and markets was the only business to report earnings above their first quarter 2019 level.
UNINSPIRING OUTLOOK
While the economic outlook has clearly improved since last year and the bank is seeing opportunities to lend in one or two strategic growth areas, uncertainties remain.
Therefore, the bank is targeting mid single-digit percentage growth in customer lending this year, although that depends entirely on the speed of the global recovery and the withdrawal of government stimuli.
The bottom line is individuals and companies have amassed significant levels of cash during the pandemic after cutting all non-essential spending, so the need to borrow is much reduced compared with a couple of years ago.
For those hoping for a return to dividends, on the strength of today’s results the bank confirmed it wouldn’t be making quarterly pay-outs and it would wait until August to announce whether it would pay an interim dividend. Investors are expecting a 4.8% yield from the bank this year after the regulator barred payments last year.
