Shares in HSBC (HSBA), Europe’s largest bank, have risen by 4% to 630p on third-quarter profit which looks to be flattered by sharply lower restructuring costs.

Today’s update sees adjusted pre-tax profit for the third quarter hit $6.2bn, an increase of 16% compared with last year’s third quarter profit of $5.3bn and well ahead of estimates of $5.75bn.

This means that at the end of the first nine months the bank has comfortably hit its medium-term targets with a return on tangible equity of 11.4% (target 11%) and a core equity tier 1 capital ratio of 14.3% (target 14%). The latter is essentially a measure of the ability of a bank’s balance sheet to withstand economic shocks.

PROFIT BOOSTED BY LOWER COSTS

Digging into the results, the big rise in earnings is mostly due to the absence of hefty costs from previous restructuring programmes. These amounted to $677m in the third quarter last year and over $2.3bn over the first nine months of 2017.

That’s not to say that the bank didn't do a decent job of growing its revenue line, but to put the results and the market reaction into perspective, once it starts reporting 2019 figures the comparisons will be less flattering.

HSBC grew its total income in the last quarter by 8.8% to $13.8bn on an adjusted basis, which excludes currency movements and makes it easier to understand the underlying trends in the business.

The Retail Banking and Wealth Management business, which contributes over 40% of group turnover, had a decent quarter with income up 14% to $5.8bn thanks to higher customer deposits in Asia and sales of life insurance products.

The Global Banking and Markets unit, which generates just over 30% of group turnover, also had a reasonable quarter with income up 10% to $4.2bn thanks to its success in trading foreign currencies and a big increase in revenue from managing cash and liquidity.

Offsetting this situation was a soggy quarter in its Private Banking arm where turnover was flat and a poor performance in the Corporate Centre division where income was down and it has cut earnings to allow for hyper-inflation in Argentina.

UK LENDING MARGINS UNDER PRESSURE

Regarding the UK it’s hard to see what the underlying trends are as HSBC lumps it in with the rest of Europe. However it does say in the statement that like other UK banks it is seeing pressure on mortgage lending spreads.

Also, it is building up provisions for costs associated with the UK’s exit from the EU including establishing a UK ring-fenced bank and what it calls an intermediate holding company in Hong Kong.

WHAT DO THE EXPERTS SAY?

Shore Capital analyst Gary Greenwood comments: ‘While rising US interest rates and a “pivot” to Asia should drive improvements in revenue growth, profitability and returns over the medium-term, the near term outlook has become more uncertain as a result the escalating trade war between the US and China.

‘This has had a negative impact on sentiment and the share price which has come down to a more sensible level from a valuation perspective. The strong third quarter result which has beaten expectations may therefore inject a little positivity into the shares today.’

Russ Mould, investment director at AJ Bell, notes the company has made market share gains in its core Asian market. ‘It is getting the basics of banking right, attracting a larger number of customer deposits in the period. The company’s investment banking arm is also performing better than several of its peers.’

He says in the first half the company’s ‘jaws’ – comparing income to operating expenses growth trends – was negative as the company continued a programme of heavy investment under new chief executive John Flint.

‘Reining back on spending a bit means the company is better positioned to fulfil its pledge to deliver positive jaws by the end of 2018. This is important as analysts had seen the negative jaws as a constraint on the performance on the shares.

“However, any scaling back of expenditure will need to be balanced with the need to make the necessary investments for future growth.’

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Issue Date: 29 Oct 2018