HSBC set aside $451 million as it braced for more defaults in China’s struggling property sector and warned of a slowdown in wealth management due to the restrictive ‘zero Covid’ strategy of Hong Kong, spoiling otherwise positive earnings in the fourth quarter.
The bank has made growing wealth management a cornerstone of its “pivot to Asia” strategy, pledging to invest $6 billion in the region and hire thousands of advisers. However, China’s efforts to stamp out the coronavirus have hampered its progress as Hong Kong’s borders remain closed and many of its branches have closed.
“The market [has] slowed due to the market downturn and restrictions in Hong Kong, but we expect this to have a temporary impact,” chief executive Noel Quinn said in an interview on Tuesday. Nonetheless, the impact continued into the first quarter, “which is traditionally the strongest,” he added.
Headwinds in its most important market offset a more buoyant earnings package, which showed the London-based lender is recovering from the worst of the pandemic and is optimistic about growth with interest rates expected to augment.
Fourth-quarter pretax profits nearly doubled to $2.7 billion, in line with analysts’ expectations. Rising revenue from trading and its UK retail arm – particularly strong growth in UK mortgages – offset declines in wealth management.
Earnings were also flattered by a further release of $276 million in Covid-related loan loss provisions in the UK and Europe. Group revenue rose 2% to $12 billion from the same period a year ago.
HSBC increased its dividend and announced it would buy back another $1 billion of shares when it completes an existing $2 billion program. He added that he should achieve his profitability target of 10% return on tangible equity a year earlier than expected, in 2023.
This is in large part by an expected windfall from increased interest rate. With a global surplus of deposits of 700 billion, the finance director Ewen Stevenson has estimated that a 1 percentage point in rates would generate 5 billion dollars of net interest income annually.
The outlook for rates has become “significantly more positive,” Quinn said. “After absorbing the impact of low interest rates for a while, we believe we have turned the corner,” he said.
“HSBC’s earnings weren’t as bad as feared,” said Citigroup analyst Yafei Tian. “Investors may become progressively concerned about the impact of Hong Kong’s macroeconomic slowdown on revenue.”
Shares fell 1% after the announcement, having recovered 25% in the past 12 months. The stock hit a 25-year low in September 2020, weighed down by lockdowns and tensions between the United States and China.
China’s real estate sector is still reeling from the collapse of property development giant Evergrande under $300 billion in debt late last year. That has fueled crises among rivals, which have struggled to refinance their own debts amid a government crackdown on borrowing and a loss of market confidence.
“The change in policy measures has created significant uncertainty, resulting in liquidity and rollover risk for customers,” Quinn said. “We thought it was wise to reflect the heightened level of uncertainty and create modeled writedowns” on its $21 billion exposure to mainland China.
The chief executive also warned of a “weaker” performance of its wealth management business in Asia earlier this year. While net new assets invested in Asia more than doubled to $36 billion in 2021, revenues fell slightly in the fourth quarter.
Hong Kong is struggling to contain a major coronavirus outbreak, with more infections in the past month than in the past two years.
Hong Kong accounts for one-third of the value of HSBC’s customer accounts globally and generates around one-third of its profits.
The bank noted in its annual report that “restrictions in Hong Kong, including travel, public gatherings and social distancing, are impacting Hong Kong’s economy and may affect the ability to attract and retain the staff”.
HSBC, like many of its peers, was forced to close around half of its branches in Hong Kong.
Last week, Standard Chartered chief executive Bill Winters warned that Hong Kong would struggle to maintain its dominant position as Asia’s top financial center the longer China persisted in its zero Covid policy.
“Hong Kong has a rebound record,” Quinn said, adding that he was still fully committed to the bank’s Asia strategy. “The slowdown in wealth is temporary – wealth creation in Asia is a huge opportunity that we have yet to seize.”
In the fourth quarter, HSBC’s investment banking revenue rose 1% as advisory and capital markets revenue rose 7%, offsetting a 2% decline in trading revenue.
However, pre-tax profit fell 41% as costs rose significantly, largely due to a 31% increase in the bonus pool to $3.5 billion, following a 20% drop in 2020. Stevenson blamed this on “significant repricing of investments.” banking talent[in the US]. . . we try to be competitive”.
On a yearly basis, pretax profits rose 115% to $18.9 billion in 2021, narrowly missing the $19.1 billion forecast. Annual revenue fell 2% to $49.6 billion.
It’s a marked change from 2020, when the bank’s provisions for bad debt exceeded $8 billion at the height of the lockdowns, ultimately knocking annual profit down 45% to $12.1 billion. .