Global banking giant HSBC (HSBA) has delivered an impressive set of first quarter results, beating analysts’ forecasts by more than 10% thanks to higher revenues and lower costs.

However all is not what it seems as the headline figures have been helped by a number of one-off improvements, so while the shares are up 2% to 682p, investors hoping for the stock to play catch-up with the rest of the UK banks may be left waiting.

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Europe’s largest bank by assets reported a 31% increase in pre-tax profits to $6.2bn in the first quarter compared with expectations of $5.6bn and earnings of $4.75bn in the same quarter last year.

HIGHER NON-RECURRING ITEMS

The beat was partly due to higher than expected revenues in Retail Banking, where deposits grew by $20bn in the UK and Hong Kong and loans grew by $30bn in the same territories.

There was also a $300m or 66% jump in revenues from making and selling life insurance products and a $133m gain on selling retail banking assets in Argentina and Mexico, which is non-recurring or non-repeatable.

The Commercial Banking unit got a temporary boost from higher margins on customer deposits in Hong Kong and the UK and a bump in UK company deposits. Income from lending increased but at a much slower rate and the bank admits it saw more ‘margin compression’ as it competed for loans.

On the plus side costs were down 12% or $1.2bn to $8.2bn, which was below expectations, although most of the improvement was down to one-offs like $400m of positive currency movements and an absence of provisions for mis-conduct which were $900m in the first quarter last year.

On the all-important topic of net interest margins – the difference between what the bank makes on lending money and what it pays on customer deposits – the downward trend continued with the margin falling from 1.67% to 1.59% mainly due to higher deposit costs in Hong Kong.

In fairness the Global Banking & Markets unit kept its nose clean with pre-tax profits flat and revenues down just 5% which given the weak performance of many other investment banks, especially the big Wall Street players, was not a bad result.

Income was down on the trading side but the boring bits like custody, securities services and managing cash balances kept the plates spinning while the private equity or ‘principal investment’ unit had a good quarter.

OVERALL GOOD, BUT NO CIGAR

While on the face of it these results look like they ought to trigger a catch-up rally in HSBC shares, and no doubt analysts will be raising their full year forecasts, the reality is there are lots of one-off items and adjustments on adjustments which flatter the numbers.

So far this year HSBC is the sector laggard up just 3%, including today’s 2% move, while Barclays (BARC) and Royal Bank of Scotland (RBS) are up 9% this year and Lloyds (LLOY) is up 21%.

Based on forecasts for this year though HSBC is already towards the top of the valuation range for the big UK banks at 12.2 times earnings compared with RBS at 12.7 times, Lloyds at 9.2 times and Barclays at just 7.7 times so a big re-rating would seem unlikely.


Issue Date: 03 May 2019