- Earnings sunk by big provisions
- News of finance chief's departure unexpected
- Rising interest rates having a positive effect
Investors registered their disappointment at the latest quarterly update from global banking group HSBC (HSBA) by wiping 8% or more than £7 billion off the firm’s market value.
Although there were a few positives in the report, they were outweighed by the negatives as the shares returned to their recent lows.
WHY ARE HSBC SHARES DOWN?
The headline figures from the bank were fairly ugly with reported revenues down 3% to $11.6 billion, customer lending down $61 billion and reported pre-tax profits down more than 40% to $3.1 billion.
The main reason for the big drop in profits was the bank was forced to take a write-down of $2.4 billion for its French retail banking operations which it has agreed to sell for just €1 to US private equity firm Cerberus.
There was also a provision of $1.1 billion for expected credit losses which reflects ‘increased economic uncertainty, inflation, rising interest rates and the ongoing developments in mainland China’s commercial real estate sector’.
In the third quarter last year the bank wrote back $700 million of provisions for bad loans as the world economy bounced back from the pandemic.
In terms of liquidity, HSBC’s core equity tier one ratio of 13.4% was below the bottom of its stated 14% to 14.5% target range although it aims to get towards 14% by the end of this year.
The market was also unsettled by the surprise news that chief finance officer Ewen Stevenson was being replaced in January.
IS THERE ANY GOOD NEWS?
It wasn’t all gloomy during the quarter as rising interest rates helped lift the net interest margin to 1.57% against 1.35% in the second quarter, although that is still the lowest level amongst major UK banks.
Moreover, the bank raised its forecast for net interest income for this year and next year based on expectations of further rate rises.
Operating profits were flat due to cost-saving measures and a $700 million tailwind from the strong dollar, and the outlook for the next year is for costs to rise by 2% or less.
Looking on the bright side, analysts at Shore Capital described the third quarter results as ‘a strong update tempered by some notes of caution in guidance’.
