HSBC Reports Strong Revenue Growth and Capital Position: A Pathway to Sustainable Dividends and Shareholder Returns

Date of Report

29 October 2024

Broker

OCBC Investment Research Private Limited

Company Overview

HSBC Holdings is a leading international financial services group headquartered in the UK, with a strong presence in the UK and Asia (excluding Japan). Its regional banking franchises mainly focus on retail and business banking, while its corporate and investment banking businesses offer unique trade financing with pricing power and credit discipline. The group’s key earnings drivers are its banking operations in the UK and Hong Kong.

Investment Thesis

HSBC boasts a strong capital position, offering sustainable and relatively high dividends. The bank is positioned to redeploy and reposition its capital for high-growth areas in Asia. Despite potential economic slowdowns in these markets, HSBC’s presence in growing trade corridors and economic zones may continue to provide growth opportunities.

Financial Summary

Last Close: GBp 692.10
Fair Value: GBp 867.18
Market Cap: GBP 18.94 billion
Key Shareholder: Blackrock Inc (18.34%)

Investment Summary

HSBC reported robust results, with underlying revenue, pre-provisions operating profit (PPOP), and underlying profit before tax (PBT) surpassing consensus estimates by 7%, 16%, and 14%, respectively. The strong performance was primarily driven by:

Non-banking Net Interest Income (NII): Increased by 19% compared to consensus forecasts, attributed to strong growth in:
- Wholesale Transaction Banking Revenue: +7% year-on-year
- Wealth Management Revenue: +32% year-on-year
Banking NII: 1% above consensus estimates.
Common Equity Tier-1 (CET1) Ratio: Achieved a ratio of 15.2%, exceeding expectations.
Dividend per Share (DPS): Maintained at USD 0.10.
Share Buyback Program: Announced an up-to-USD 3 billion buyback for this quarter.

Capital Position

The CET1 ratio of 15.2% is 30 basis points ahead of consensus estimates. The announced share buyback program is expected to impact the CET1 ratio by about 40 basis points on a pro forma basis, but it remains well above the target range of 14.0% to 14.5%. This robust capital position supports further share buybacks going into the next year.

Performance Metrics

Return on Tangible Equity (ROTE): Targeting mid-teens in 2024 and 2025.
Net Interest Margin (NIM):
- Asia: Declined by 5 basis points quarter-on-quarter to 1.58%.
- UK Ring-fenced Bank (RFB): Remained flat at 2.57%.

Risks and Challenges

Regulatory Requirements: Increased capital holding and higher costs may dampen future profitability.
Brexit Implications: Potential adverse effects on economic growth, financial stability, and asset prices in the UK.
Global Trade Concerns: Rising protectionism could negatively impact the macroeconomic outlook.

ESG Updates

ESG Integration: HSBC leads industry peers in enhanced ESG due diligence in financing activities, though it faces criticism over funding fossil fuel projects and alleged ethics-related issues.
Data Security: The bank collects substantial personal data and has a robust data security framework to prevent potential breaches.

Potential Catalysts

Faster-than-expected US rate hikes and stronger global economic conditions.
Improved cost controls and a rebound in Global Banking & Markets revenue.
Smooth execution of the new strategic plan.