HSBC's (HSBA) third-quarter headline profit before tax of $6 billion was up by nearly a third compared with the year-ago quarter, primarily because of a $1.1 billion noncash accounting gain on the bank's own debt and the non-recurrence of large misconduct provisions in the year-ago quarter. Underlying results were much less impressive and showed the impact of slow economic growth, in our opinion.
A move to Hong Kong could subject HSBC to more meddling by the Chinese government
Adjusted profit before tax of $5.5 billion was down 14% from the year-ago quarter, as adjusted revenue fell 4% and adjusted costs grew 2%. Despite the difficult quarter, return on average tangible equity remained reasonable, at 12.1% for the nine months ending September, and we think the bank's narrow moat is intact. Our long-term view that the bank can outearn this by about 100 basis points as conditions improve is also intact, and we plan to maintain our fair value estimate.
We're not surprised by HSBC's disappointing progress on costs for two reasons. First, regulatory costs for global banks are continuing to rise, and HSBC, one of the two largest global systemically important banks, is no exception – it blamed much of its cost inflation on regulatory and compliance costs, with inflation also mentioned as a major contributor. Second, HSBC's strategy, announced in June, had always been aimed less at shrinking on an absolute basis than on shifting operations from lower-earning businesses to higher-earning ones. Progress on costs is therefore likely to be difficult to measure at the group level.
For us, the best news in HSBC's results was from Asia. Volatile conditions there have caused us to worry about losses, so we were pleased to see that loan losses were just 0.13% of loans in the quarter, down from 0.19% in the year-ago quarter. Still, the news there wasn't all good. Adjusted profit before tax, while up 4% for the nine months ending September compared with the year-ago period, was down 4% compared with the year-ago quarter. Lending too was down, falling 2% compared with the year-ago quarter, driven by a 4% drop in wholesale lending.
As Asia is key to HSBC's strategy, we'll keep a close eye these numbers. We're not particularly concerned that HSBC may not announce its decision on its headquarters location until 2016, missing its self-imposed 2015 deadline. We don't have a strong view on the best outcome of this decision, though we don't see any obvious good choices.
A move to Hong Kong could subject HSBC to more meddling by the Chinese government, and a move to the United States wouldn't necessarily reduce the regulatory burden, in our opinion, especially given HSBC's trouble with money laundering. We think HSBC has gotten much of what it wanted from its threat to leave the United Kingdom – the bank levy will be based on U.K. balance sheets, rather than global balance sheets – and we think it is likely to decide to stay put.
