Heavyweight bank HSBC (HSBA) is dragging on the FTSE 100 today after a poor third quarter update and an admission that its 2020 return target is no longer realistic.

Shares in the global bank fell 4% to 593p, the biggest loser on the FTSE 100 index.

As well as rising provisions across the bank for credit losses, the Global Banking and Markets unit had another weak quarter with revenues down close to 25% and net operating income down 15% on last year.

The bank admitted that ‘the revenue environment is more challenging than in the first half of 2019 and the outlook is softer than we anticipated’. As a result it warned that it need to reduce its cost base which could result in ‘significant charges’ in the fourth quarter and beyond, meaning it will no longer be able to reach its Return on Tangible Equity target of 11% next year.

CREDIT LOSSES RISING

The core Retail Banking business saw a 3.9% increase in revenues to $3.98bn in the third quarter, thanks to a push in current and savings accounts, although the increase was partly offset by a fall in mortgage income and a fall in revenues at the Wealth management business. As a result the combined unit reported net operating income of $5.63bn, flat on last year.

The Commercial Banking business generated a healthy increase in loan revenues and global cash management, driven by demand in the UK and Hong Kong, pushing net operating income up 3.8% to $3.79bn.

However both businesses saw a sizeable increase in expected credit losses last quarter. Over the first nine months, credit losses in the Retail Banking and Wealth Management unit rose 24% to $1bn as the bank pushed into unsecured lending. In Commercial banking provisions were up 200% to $900m driven by increases in the UK and Asia.

INVESTMENT BANK WOES

The Global Banking and Markets unit once again under-performed, with a poor performance in just about every department, despite the high salaries being forked out here and in Asia.

Fortunately the boring bits like securities services, liquidity and cash management and trade finance helped stem the decline, but as we flagged in our Under the Bonnet feature in January the investment bank soaks up a lot of capital for precious little return and it adds risk.

CHANGE IS COMING

From today’s statement, it seems as though the top brass may also have lost patience. Noel Quinn, chief executive, admitted that ‘in some parts performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK and the US.

‘Our previous plans are no longer sufficient to improve performance for these businesses, therefore we are accelerating plans to remodel them and move capital into higher growth and return opportunities.’

The bank wouldn’t be drawn on what the shake-up might mean for its various units, or when it expected to hit its 11% return target, saying simply that investors would have to wait until the publication of the full year results in February for its next strategy update.

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Issue Date: 28 Oct 2019