HSBC reports fall in earnings
HSBC dropped its 2020 profit target, reported a sharp fall in earnings and warned of a costly restructuring, as interim CEO Noel Quinn seeks to tackle its problems headon in his bid for the fulltime role.
HSBC dropped its 2020 profit target, reported a sharp fall in earnings and warned of a costly restructuring, as interim CEO Noel Quinn seeks to tackle its problems head-on in his bid for the full-time role.
Quinn branded the lender’s sluggish performance in Europe and the US as “not acceptable”, but said investors may have to wait until early 2020 to hear his full plans to “remodel” Europe’s biggest bank by assets.
The latest HSBC restructuring comes in a gloomy business environment, including an escalating Sino-US trade war, Britain’s protracted EU withdrawal, easing monetary policy cycle and unrest in Hong Kong.
HSBC reported pretax profit of $4.8bn for the third quarter on Monday, compared with the $5.3bn average of analysts’ forecasts. “Overall a poor set of results,” said analyst Edward Firth at broker KBW. “But the good news is that this performance looks set to finally goad the management into taking some of the actions to address underperforming businesses that we have been awaiting.”
The bank’s share price fell 3% in London on Monday morning, compared with the 0.5% dip in the Stoxx European banks index. The earnings update is HSBC’s first under Quinn and is widely seen by shareholders and insiders as a report card on his audition for the CEO role full-time.
“Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth,” Quinn said of the bank’s operations in the US and Europe.
As a result of a “more challenging” revenue outlook compared with that of the first half of the year, HSBC said it did not expect to meet its return on the tangible equity target of 11% in 2020.
HEADACHES
A veteran of the bank since 1987, Quinn has made it clear he is keen to secure the permanent appointment of CEO from chair Mark Tucker, who said in August the search to replace the ousted John Flint would take six to 12 months.
One of Quinn’s biggest headaches is HSBC’s US retail banking business, which has struggled for years against much bigger domestic rivals. It booked a loss of $189m in the first nine months of the year.
Some analysts have said the bank could look to shut down the business, but Quinn dismissed the notion. “You should not read into anything I’ve said that we are looking to exit the retail bank in the US,” he said on Monday, without ruling out scaling it back.
HSBC’s investment bank is another sore spot, with profits down 22% in the first nine months of the year. Its trading businesses in particular had a tougher third quarter than US peers, with revenue down 22% in fixed income, currencies and commodities, and down 26% in equities.
Quinn said the bank, which generates the bulk of its revenue and profit in Asia, would shift capital away from low-return businesses and further cut costs by simplifying HSBC’s notoriously complicated management structure.
THE ECONOMY IS GETTING IMPACTED BY TWO THINGS: THE US-CHINA TRADE DISPUTE AND THE HONG KONG PROTESTS
“There is scope throughout the bank to clarify and simplify roles, and to reduce duplication,” he said.
Such action could result in significant costs in the fourth quarter and beyond, including the possible impairment of goodwill and additional restructuring charges, the bank said.
HONG KONG PROTESTS
The outlook in the near and medium term for HSBC and rival Standard Chartered has also been clouded by antigovernment protests in Hong Kong, site of their single biggest profit centres. HSBC said its expected credit losses — including a “charge to reflect the economic outlook in Hong Kong ”— increased by $400m in the third quarter. Revenue for the first nine months of the year in Hong Kong, however, rose 7%.
“Obviously, the economy is getting impacted by two things: the US-China trade dispute and the [Hong Kong] protests,” said CFO Ewen Stevenson. The bank is particularly monitoring its portfolio of small business customers who may be feeling the strain, he said.