Rising costs, US settlement crimp HSBC profit

Expenses rise as bank shifts to growth mode

HONG KONG/LONDON: HSBC Holdings Plc posted a small increase in first-half pre-tax profit yesterday, as rising expenses from investments in a new growth strategy and a US$765 million settlement for alleged misselling of US mortgage securities ate into higher revenues.

Europe’s biggest bank reported a pre-tax profit of US$10.7 billion in the six months through June, up 4.6% from the yearago period.

As the bank spent on hiring more frontline staff and expanding digital capabilities, its costs climbed 6% to $17.5 billion.

“HSBC is struggling to convince that its current restructuring to pivot the group toward Asia is delivering the hoped for pickup in growth,” said Steve Clayton, manager of the Hargreaves Lansdown UK Income Shares fund.

HSBC chief executive John Flint, who started in the job in February, set out a three-year plan in June to invest $15-17 billion in areas such as technology and in China.

“We are taking firm steps to deliver the strategy we outlined in June. We are investing to win new customers, increase our market share, and lay the foundations for consistent growth in profits and returns,” he said in a statement.

Flint is part of a new management duo at the top of HSBC after Mark Tucker joined as chairman last October.

The main points of the bank’s refreshed strategy came as little surprise to HSBC investors, with the focus squarely on further expansion in China and its prosperous southern Pearl River Delta region in particular.

The bank is also seeking to expand further in the British mortgage market as one of eight new strategic targets.

Pre-tax profit for the first half from Asia jumped 23% to $9.4 billion, representing 88% of the group total.

“The bank has not seen any impact yet either on its own performance or that of its customers from rising US-China trade tensions,’’ Flint said, “but is concerned about how tit-for-tat tariffs could affect investor confidence.

“I’d be concerned the general rhetoric has a bad impact on investor sentiment and investors go risk-off,” he told Reuters.

HSBC’s retail banking and wealth management, and commercial banking divisions performed most strongly in the first half, Flint said, adding both continued to gain from a positive interest rate environment.

The bank’s strong performance in its core Asian markets was marred by tumbling profits elsewhere.

HSBC said it has set aside $765 million to resolve a civil claim by the US Justice Department over allegations the bank missold toxic mortgage-backed securities in the run-up to the 2007-8 financial crisis.

The settlement wiped out almost all of the bank’s profit for the first half of the year in North America, where it is trying to turn around a US business that has for years underperformed.

Part of that plan includes a push into the US credit card and personal loans market, where it faces a battle against heavily entrenched domestic competition.

Flint told Reuters it was too soon to see any results from that new strategy.

“HSBC’s shares are unlikely to climb significantly until the bank can show its revenues rising above i ncreased costs,’’ analysts and trader said, describing a trend known as ‘positive jaws’ in city parlance.

“Our business plans do see us get to positive jaws at the end of the year,” Flint told analysts on a conference call, citing the benefits of rising interest rates on the bank’s profits as one contributor to that outlook.