Despite mixed fourth-quarter results, HSBC (HSBA) remains one of the most exposed large global banks to changes in interest rates, and is set to significantly benefit as rates rise. The bank’s shares fell yesterday as it revealed a 60% fall in profits in the fourth quarter of 2016.
Given its lending base, it estimates that annual net interest income could increase $6.8 billion or 24%, assuming a 25-basis-point shift in yield curves at the beginning of each quarter.
The exposure is substantial given 61% of its overall lending portfolio is wholesale, largely variable, and 39% of its portfolio has a term of less than one year. This level of exposure is mainly driven by its U.S. operations as well as its Hong Kong operations that are linked to the U.S. yield curve, and the nature of trade finance, which tends to be very short term.
What was Wrong with the Results?
Areas of disappointment in the quarter relate to the ongoing write-offs, concerning trade finance trends – although Asian trade has picked up recently with the recovery in commodities – and stagnant growth.
Pluses include the ongoing success at repositioning the bank, including its cost to achieve program that has invested $4 billion to obtain $3.7 billion in run-rate savings. The bank updated its plan to achieve about $6 billion in savings by the end of 2017, but will require another $2 billion in investment to achieve this, which we see as reasonable. In a difficult growth environment, we see costs as the more straightforward lever for the bank’s management team to pull to improve returns. HSBC’s dividend was up a penny to $0.51, and the bank completed $2.5 billion in share buybacks and announced plans for a further $1 billion in 2017.
With a very well capitalised common equity Tier 1 ratio of 13.6%, the bank could arguably return more, especially with an estimated $8 billion in its U.S. subsidiary, which has disappointed some observers. However, we expect with the unusually volatile market, HSBC wished to remain cautious and its plans on the buyback could certainly be updated throughout the year, perhaps when the new chairman is announced sometime in 2017.
Quarterly results were markedly affected by $2.4 billion in goodwill write-offs relating to European private banking, which was principally the purchase of Safra Republic Holdings in 1999, as well as $1.1 billion in cost to achieve investments and $1.6 billion due to adverse credit spread movements. On an adjusted basis, results were essentially flat with 2015 with revenue down 2% to $50.1 billion and pretax profit down 1% to $19.3 billion.
Net interest income on an adjusted basis fell to $28.9 billion from $29.8 billion, which is a 15-basis-point decline in the bank’s net interest margin to 1.73%, mainly reflecting competitive pricing in the U.K market, the U.S. portfolio in run-off, and the disposal of its Brazilian operations. It’s worth noting that the bank is well prepared for Brexit, largely due to its Paris location where it may move 1,000 employees over the next few years, but it has all of the licenses needed to support its clients at this point.
