HSBC sustains dividend policy despite fall in profits – focus now on growth

HSBC Bank Malta plc has published its interim results for the first six months of 2018, reporting a profit before tax of €16.2 million. This translates to a decline of 38 per cent, or €9.8 million, over the corresponding period last year. The profits were affected by the bank’s long-term strategy of derisking the business, as well as by the continuing impact of low interest rates.

Profit after tax for the period was down from €16.8 million to €14.3 million, as the effective tax rate was 11 per cent as the bank benefitted from a different tax treatment applied on a specific transaction. As a result, earnings per share were also down to 4 cents, compared to the previous year’s 4.7 cents.

This downturn in profits was somewhat expected, as it was the result of a strategy focused on mitigating risks and improving compliance. During the first half of 2018, the bank has implemented several de-risking actions, as well as overhauling its compliance function, in line with the highest global standards of financial crime compliance.

The implementation of these actions is now nearing completion, and thus, the bank is now transitioning into a new phase of its long-term strategy, shifting its main focus to growth and value creation by enhancing return on equity.

Net interest income for the period under review was down by 10 per cent compared to the first half of 2017, partly as a consequence of a lower average yield on the investment book and the contraction of the commercial banking loan book.

On the other hand, non-interest income remained relatively stable as net fee income was recorded at €11.9 million. A higher volume of credit facilities was registered while guarantees and derivatives transactions generated higher income. Both these improvements are a result of the strategic direction taken by the bank in 2017.

During the period, HSBC incurred €54.9 million in operating expenses, 5 per cent higher than the corresponding period last year, despite its ongoing rigorous cost control. This reflects the bank’s investment in its compliance function and business growth.

HSBC Life Assurance (Malta) Ltd also saw a significant reduction in profit, but this was mainly due to an abnormal gain from market movements registered in 2017, which was not repeated during this period. The number of new single premium policies, however, was also lower, dragging the premium income downwards.

With regard to the group’s fi- nancial position, customer deposits were 1 per cent higher than at the end of 2017, as deposits increased in all segments of customers of the commercial banking business. The advancesto-deposits ratio remained unchanged at 65 per cent, indicating no material change in the bank’s liquidity position.

The common equity tier 1 Capital Ratio was slightly improved at 14 per cent, from the 13.9 per cent recorded at the end of 2017. The total capital ratio was down by 0.3 percentage points, to a still healthy 14.1 per cent, compared to 31 December 2017. The fact that the bank has managed to maintain a strong capital position has enabled the board to sustain the 65 per cent dividend payout policy. In fact, a gross interim dividend of 4 cents per share is being recommended by the board of directors, to be paid on 18 September 2018 to all shareholders as at 17 August 2018.

CEO Andrew Beane has suggested that the bank is now in a good position to expand its revenue streams at a faster pace than its costs, without having to increase its risk appetite. Some benefits of the strategy undertaken by the bank in the past months are already evident, such as increased volumes in parts of the retail banking and wealth management business. During the next few months the bank can now focus more on achieving growth and creating value.

Market reaction

In the aftermath of the announcement, the equity initially came under a bout of selling pressure, with the share price at one point declining to €1.86. However, the equity immediately recovered to the previous week’s closing of €1.89 within the same day – Monday. On Tuesday, the equity did post a 1.1 per cent fall to close at €1.87 but managed to bounce back during the rest of the week, ultimately closing unchanged week-on-week at €1.89. Notwithstanding the decline in profits, investors are taking a long-term view and awaiting the growth potential being promised by the bank. The 65 per cent dividend pay-out remains the main attraction for investors.

This article by Jesmond Mizzi, Managing Director of Jesmond Mizzi Financial Advisors Ltd, does not intend to give investment advice and its contents should not be construed as such. The Company is licensed to conduct investment services by the MFS, is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients, are likely to have an interest in securities mentioned in this article. For further information contact Jesmond Mizzi Financial Advisors Ltd at 67, Level 3, South Street, Valletta, or on Tel: 21224410, or email info@jesmondmizzi.com

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