HSBC reaps benefits of surging interest rates with $3.2bn profits
HSBC has reported better-than-expected profits for July to September after the bank reaped the benefits of surging interest rates that have raised borrowing costs for customers.
The London-headquartered lender said net interest income, which is the difference between what it charges for loans and pays in interest on deposits, jumped by a third to $8.6bn (£7.6bn) in the third quarter.
It benefited from climbing interest rates, including in the UK, where the Bank of England has increased rates to 2.25% from record lows of 0.1% last year, in an attempt to tackle inflation, which recently surged to 10.1%.
That helped HSBC report pre-tax profits of $3.2bn for the quarter, above average analyst estimates of $2.5bn.
While it marked a 42% drop in profits from the same period last year, the bank was facing tough comparisons. That was partly due to the fact that – like most lenders – HSBC was releasing cash that it had originally put aside for defaults during the Covid crisis last autumn.
HSBC said on Tuesday it had put aside $1.1bn to protect itself against potential defaults in the third quarter. That is more than the $884m that analysts had expected, and compares with the $659m it released last year.
The bank said economic conditions had deteriorated due to the invasion of Ukraine and the continued effects of the Covid pandemic, which together led to surging inflation, higher interest rates and volatility across financial markets.
Inflation had also squeezed the finances of its borrowers, forcing HSBC to put aside more cash for potential defaults.
The lender also noted the impact of the UK government’s disastrous minibudget last month, which sent financial markets into a tailspin, pushed some lenders to withdraw mortgage products, and forced the Bank of England to intervene with a £65bn emergency bond-buying programme to prop up some pension funds.
“Recent economic policy in the UK caused the value of sterling to fall and yields on government securities to rise sharply, increasing uncertainty around the path of future Bank of England policy rates,” HSBC said. “We are closely monitoring the impact of these developments and any implications on our business.”
While HSBC said the outlook for revenues was positive, it warned that the drop in the value of the pound had forced it to shave $1bn off its net interest income forecasts for 2023 to $36bn. However, that could be compensated by higher income this year, linked to higher than expected interest rates.
The chief executive, Noel Quinn, cheered the bank’s performance. “Our strategy produced good organic growth in all three global businesses, and net interest income increased on the back of rising interest rates. We retained a tight grip on costs, despite inflationary pressures, and remain on track to achieve our cost targets for 2022 and 2023,” he said.
Quinn stressed that the bank was focused on increasing returns shareholders. It comes as HSBC tries to mollify its largest investor, the Chinese insurance giant Ping An, which is pushing to separate HSBC’s profitable Asian business from the rest of the bank’s operations in an attempt to improve its performance.
However, Quinn has refused to entertain the proposals, saying splitting the business would come with “material costs” and a “high risk of failure” that could harm investors long-term.
HSBC also unexpectedly announced on Tuesday that Georges Elhedery, the co-head of its global banking and markets division, would replace Ewen Stevenson as chief financial officer. Stevenson, who joined HSBC from Royal Bank of Scotland in 2019, will step down from the role at the end of the year.