HSBC shares fell to their lowest level since 2020, after the bank announced a 80% drop in its quarterly profit. It also took a $3bn hit on the value of a stake it holds in a Chinese Bank.
HSBC announced on Wednesday that the pre-tax profit for the last three months of 2023 was $1bn, down from $5bn a year ago. The company’s pre-tax profit for the entire year increased by 78 percent to $30bn due to higher interest rates. However, its disappointing final quarter of the year led it to fall short of analysts’ expectations.
HSBC shares dropped 8.4 percent, the biggest drop since April 2020 when the Covid-19 pandemic caused the markets to be more volatile.
HSBC’s Noel Quinn, chief executive of the bank, blamed Bank of Communications’ impairment on a “technical adjustment”. He said it did not “affect our view of China; we are a committed investor in China. . . And remain confident about the economy”, the bank projects that it will grow by 4,9% in 2024.
The UK-based bank earns the majority of its profits in Asia, and has a 19.5% stake in BoCom. Standard Chartered , HSBC’s competitor, took a $700mn impairment charge in October on its investment with China Bohai Bank. StanChart will report its full-year results on Friday.
Citigroup analyst Andrew Coombs characterized the fourth quarter of 2013 as “messy”, and “complicated” by “a series one-offs”. The global lender reported other charges including a PS500mn charge to cover hyperinflation and a $2bn writedown for the sale of a loss-making French retail network, as well as $300mn in impairments due to unsecured loans in Mexico.
Bank of England and US Federal Reserve have both signaled that they will cut interest rates in 2024, resulting in a lower forecast of net interest income than the analysts.
The results show how banks are being hit by the slowdown in China’s economy. HSBC is one of the largest trade financers in the world. Data shows that China reported the smallest amount of foreign direct investment it has ever received.
HSBC increased its reserves by $200mn in order to cover the expected credit losses on commercial properties in mainland China. This brings the total amount to $1bn over the course of 2023.
Quinn stated in October that the worst of China’s property market was behind it and that government policies were working. He said, “I still think that,” on Wednesday. “I saw a gradual and progressive recovery in that market”, he said, adding it would take some time to “work out challenges”.
The bank stated that Quinn’s pay package jumped from PS5.6mn (£5.6mn) to PS10.6mn (£10.6mn), due to payouts made from a long term incentive plan.
The award reflects Quinn’s “leadership” in reshaping [the bank] to deliver sustainable returns to shareholders, HSBC stated. However, it also noted that Quinn now earns 169 times the average UK HSBC worker, up from 95 last year. The total bonus pool of the bank increased by 12 percent to $3.8bn.
Barclays, a rival investment bank, cut the bonus pool on Tuesday and reduced the compensation package for its CEO CS Venkatakrishnan. Wall Street banks Goldman Sachs JPMorgan Chase, and Morgan Stanley, on the other hand, have all given their chief executives pay increases.
HSBC has announced a new share buyback of up to $2bn, and a quarterly dividend of 31 cents per share. Quinn stated that the distributions to shareholders, which included the highest dividend for the full year since 2008 at 61 cents a share, were a reflection of “four years’ hard work” and the strength in the balance sheet of the bank, despite the higher interest rates.
Georges Elhedery said, if the conditions were right, that “we are still intent on having a series of rolling share buybacks”.
Net interest margins, which are a key measure of profitability in lending, increased to 1.66 percent for the entire year as the bank benefitted from higher interest rates. HSBC, as one of the largest deposit-taking banks in the world, is particularly sensitive to interest rate changes.
The bank expects net interest income to reach at least $41 billion in 2024, compared with $36 billion in 2023.
The return on tangible equity (a measure of profitability) was 14.6% for the year. This is up from 10% a year ago, but below analysts’ expectations of 17.6%.