HSBC Holdings reported a record US$30 billion pretax profit for 2023, but its shares still tumbled on Wednesday because fourth-quarter numbers were marred by several charges totalling nearly US$6 billion ($8 billion).
The good news is the UK-based bank still has plenty of spare cash to hand out to investors and will have more to pay out this year. The less good news is that HSBC will have to work harder to generate cash returns next year and beyond.
Cuts to interest rates in key markets will likely limit revenue growth from now on. At the same time, the significant sales of unwanted businesses that have reshaped HSBC in recent years and freed up capital for buybacks will soon be finished. The bank will be reliant on straight profits to fund future payouts.
The fourth-quarter charges caught investors off guard, even though they had been partly flagged at third-quarter results. The biggest was a US$3 billion impairment in the value of HSBC’s 19% stake in China’s Bank of Communications. The charge is an accounting assessment rather than anything directly driven by the performance of BoCom itself.
The cost didn’t cut into HSBC’s capital because it could simultaneously release regulatory deductions linked to the BoCom stake. When banks own stakes in other financial companies, these are seen by regulators as posing extra risks, so rules require that part of the value of such stakes be discounted from the owner’s equity in capital calculations. A bank can add deductions if it sells a stake or cuts its carrying value.
One reason behind HSBC’s share price fall was the fear that further losses could come from the BoCom stake. However, Chief Financial Officer Georges Elhedery sought to reassure investors by saying the bank still had US$14 billion of regulatory deductions to cushion against any possible future impairment.
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The other surprising charge was a US$500 million hit on HSBC’s Argentina business, due mainly to the sudden near-60% devaluation in the peso late last year.
Despite these hits, the bank declared another US$2 billion stock buyback to be done in the next few months, which follows last year’s US$7 billion of repurchases and US$12 billion in dividends. These returns put HSBC among the biggest players in European banking alongside banks such as UniCredit of Italy and France’s BNP Paribas.
There will be more to come from HSBC when it completes the sale of its Canadian consumer bank before the end of March. That will free up another roughly US$10 billion in capital. The bank will likely pay a special dividend of 21 US cents a share (or US$4.3 billion in total) when the deal goes through, but that will still leave it with another US$8 billion in excess capital to fund investments and further buybacks this year, according to Andrew Coombs, analyst at Citigroup.
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Beyond this year, there might not be much spare cash sloshing around. With interest rates peaking and expected to decline in the US —which directly drives Hong Kong rates through the pegged currency — and HSBC’s other core market in the UK, income from loans and deposits will also be squeezed.
HSBC’s guidance for full-year net interest income in 2024 of “at least US$41 billion” was lower than the approximately US$44 billion some analysts had been expecting, which could cut into earnings forecasts for this year. HSBC’s significant business exits — and the capital gains and releases they have delivered — are also finished for the foreseeable future.
Still, the bank stuck to its forecast for a mid-teens return on tangible equity, which equates to post-tax profits of more than US$20 billion for 2024, about half of which should be paid out in dividends. That will still be a decent yield of 9% to 10%, but after the Canadian gains are spent, there could be much less for buybacks in 2025 and beyond. — Bloomberg Opinion
