Cancelled dividends during the Covid-19 pandemic and weak returns on equity were the catalysts for HSBC’s biggest shareholder, Ping An, to launch its breakup campaign last year. Buybacks are also one of the main ways investors discriminate between European banks, putting a much higher value on those with plenty of excess money and healthy payouts.
HSBC is answering the payout questions with gusto: On top of the $4 billion of buybacks declared so far this year, the bank is promising a special dividend of 21 cents per share (worth about another $4 billion) as soon as it completes the sale of its Canada business next year. That will still leave it with excess capital, and the bank will generate more through the year, suggesting billions more in buybacks. Bank of America Corp. analysts reckon total dividends and buybacks will amount to $38 billion this year and next.
This is helping HSBC to boost expected returns because buybacks reduce the equity against which profits are compared. The bank lifted its forecast for returns on tangible equity (which excludes things like goodwill in the equity base) to the “mid-teens” from more than 12%.
Analysts already forecast 16% returns this year before the bank’s upgrade, so that number is likely to rise. For comparison, Lloyds Banking Group, a much more efficient and UK-focused business, is forecast to make a 14.9% return this year, while BNP Paribas SA of France, a bank with a similar business model to HSBC, is set to make just 11.2%. JPMorgan Chase & Co., which benefits from a hugely profitable US retail business, is expected to make 21% and DBS Group of Singapore is expected to make nearly 17%.
Good cost control is also helping returns. The bank is targeting just 3% growth in expenses for the full year including investment in new technology, which will be less than half the UK inflation rate but higher than that in Hong Kong. This control will help maintain returns over the next couple of years, but the real questions are about whether the strong revenue lasts and where future growth will come from.
The bank — like many peers — is over-earning net interest income at the moment as interest charged on loans has risen much faster than costs on deposit funding. HSBC saw its biggest increase in net interest margins in the UK, where government and regulators have complained loudly about banks not passing on rate rises to savers. It remains to be seen whether this noise will turn into any punitive action, but deposit costs will catch up in all markets eventually and interest income will get squeezed.
HSBC is also benefitting from using more of its deposit base to fund its global markets business, which drove a big rise in revenue from trading gains. That will likely also be curtailed by rising deposit costs. At the same time, total customer loans have shrunk versus the end of the first quarter and the same period last year. The chances of better loan demand next year are heavily dependent on major economies not slipping into recession.
The bank’s main stories about growth come from wealth management and insurance in Asia, and its technology-focused corporate banking push following the acquisition of the UK arm of Silicon Valley Bank this year. It’s still hard to see how the tech business is going to make a big difference: HSBC has so far only added a tiny UK book of loans and small teams of bankers hired in the US, Hong Kong and Israel.
The wealth and insurance business has more potential: It is focused on the Greater Bay Area of Hong Kong, Shenzhen and seven other southern Chinese cities. The reopening of Hong Kong’s borders after Covid has helped sales of offshore savings and insurance business to mainland Chinese people. But the pace of growth in fees from this business is still dwarfed by the rise in interest income in personal banking.
The profits and buybacks expected for at least the next couple of years suggest HSBC shares should be valued more highly than they are. Although European investors are likely to be more than happy, Asian shareholders will take more convincing.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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