Shares in global banking giant HSBC (HSBA) fell 4% to 328p, their lowest level since the financial crisis in 2009, after first half earnings missed expectations and the firm increased its forecast for full year bad loan provisions.
Profits before tax for the six months to 30 June were down 65% to $4.32 billion against a market forecast of $5.67 billion, due to lower revenues and higher expected credit losses. The figures also included a $1.2 billion impairment charge for ‘software intangibles’ in the European business.
Group revenues were down 9% in the half to $26.7 billion, reflecting lower global interest rates, a lower net interest margin – the difference between the interest rate the bank charges on loans and the rate it pays on customer deposits – and the impact of negative market moves on its life insurance products business together with lower valuations within the global banking and markets division.
The Asian business, which makes up the majority of profits, delivered first half pre-tax earnings of $7.4 billion in spite of rising US-China political tensions, driven by a strong performance at the banking and markets division. In contrast, Europe registered a loss of $3.06 billion.
On a constant currency basis lending increased by £12 billion as corporate customers drew on new and existing lines of credit and re-deposited the cash back in the bank. In total, deposits increased by a staggering $133 billion on a constant currency basis, which meant the bank was paying out more on new deposits than it could make on new loans.
The real blow for investors, however, was the news that the bank was raising its forecast for expected credit losses to between $8 billion and $13 billion after taking a not inconsiderable $6.9 billion of provisions in the first half due to the worsening economic outlook and charges related to specific corporate customers.
The bank said there was a high degree of uncertainty in its forecasts due to the virus, and regarding the UK specifically – where second quarter losses reached $857 million and provisions for credit losses increased by $1.5 billion – due to uncertainty over the outcome of Brexit talks.
While the firm said it saw a recovery in 2021, this would not be enough to offset this year’s downturn so it would press ahead with its programme of cost cuts in order to offset lower revenues.
The bank began the year expecting costs to be flat, according to chief financial officer Ewen Stevenson, but thanks to a 7% reduction in the second quarter due to ‘very subdued activity’, lower travel expenses and lower headquarters costs, it now saw full year costs down at least 3% with savings of another $500 million in the second half.
After warning of up to 35,000 job losses at the start of the year, the bank put its redundancy plan on hold in March. Some 4,000 staff and contractors left the firm in the second quarter, but the need to reduce cost pressures means considerably more job losses are on the cards.