Pearson sees sales edge up
HSBC HAS reported an unexpected fall in first quarter profits due to an increase in investment and announced plans to initiate a new share buyback of up to £1.5bn.
Europe’s biggest bank said pretax profit fell 4 per cent in the first quarter to £3.5bn, largely due to a rise in operating expenses.
Costs related to business investment and improving digital capabilities rose 13 per cent, which outstripped revenue growth which rose 6 per cent.
HSBC also said it will shortly commence its latest share buyback, following £4bn worth of share repurchases over the last two years.
New chief executive John Flint, who took over in February, said that HSBC is benefiting from interest rate hikes and economic growth.
He said that the bank’s primary focus is to grow the businesses safely, and the bank has increased investment to deliver that goal.
Net income came in at £2.3bn, little changed from the previous year.
Last year, HSBC completed a corporate overhaul to raise profitability by focusing more on highgrowth Asian emerging markets while shedding businesses and workers in other countries.
Charlie Huggins, manager of the Hargreaves Lansdown Select UK Income Shares fund, which holds shares in HSBC, said: “The increased investment for growth suggests management are feeling more confident in their prospects. However, it will weigh on near term returns.
“We expect the shares to be a bit weaker as investors focus on the latter and await evidence that these investments are paying off.”
HSBC said the £1.5bn windfall is likely be the only share buyback this year, as Mr Flint looks to invest instead in the bank’s twin homes of Britain and China in a bid to boost returns.
The bank’s shares fell in a sign of immediate investor scepticism that the bank’s new investments will pay off after years spent focusing on cutting unprofitable parts of the business.
Mr Flint said: “For us to get to a 10 per cent return on equity, we will have to grow the business. It’s very hard to get there just by shrinking the cost base.”
HSBC also took a surprise £662m in provisions against expected settlements for past misconduct cases, which it said included a US Department of Justice investigation into its sale of toxic mortgage-backed securities.
The provision is a sign the bank has advanced its talks with the US authority, as it inches towards settling its involvement in the sale of the products during the build-up to the 2007-2008 crisis.
Educational publisher Pearson eked out a rise in sales over the first quarter as the firm presses ahead with a sweeping cost-saving programme.
The group, which is embarking on a restructuring, reported a 1 per cent rise in underlying revenues in the period, with growth in North America making up for declines elsewhere. Pearson said its “cost efficiency programme” is on track to deliver £300m of annualised savings by 2020.