HSBC Holdings Plc is a bank in limbo. Pandemic-related bad loans have messed up its cost-reduction plan. Coming in the crosshairs of the US-China conflict made investors nervous about the jewel in its crown: the Hong Kong franchise.
Lower-for-longer interest rates aren’t good news for its margins. Add a UK regulatory ban on paying dividends, and there were ample reasons this year for investors to drive the stock price down to a 25-year low.
The only real confidence booster was last month’s move by Shenzhen-based Ping An Insurance Group Co, the bank’s largest shareholder, to raise its stake to 8%.
The other saving grace is symbolic: Stephen and Stitt, the two lion icons that guard its Hong Kong regional headquarters, are back on duty after being vandalised during street protests earlier this year. But to shareholders, the third quarter’s US$1.3bil income from trading currencies and bonds – a 13% jump from a year earlier – won’t qualify as much of a roar.
For that, chief executive officer Noel Quinn must show the road to normal profitability in 2022 and beyond.
The latest results hold some clues. As expected, a slide in the net interest margin to 1.2% – 36 basis points lower from a year earlier – drove down operating income, but operating expenses remained in check. More crucially, credit impairment charges fell sharply, and the bank said that full-year bad loan costs are likely to come in at the lower end of a previously announced US$8bil to US$13bil range. The 21% slide in adjusted pre-tax profit to US$4.3bil beat the consensus estimate of US$2.8bil.
A worsening of Covid infections in the US and Europe could muddy the recovery. Still, the bank has a common equity tier-1 ratio of 15.6%. That’s more than enough capital. Provided it gets the regulator’s nod, HSBC said it would consider paying a conservative dividend for 2020 – depending on the economic outlook for 2021.
That’s not the only reassuring news.
A lead for Joe Biden in the US presidential elections means investors are paring expectations of an all-out financial cold war with China. Quinn may not have to immediately choose a side – and that can only be a good thing for the Hong Kong business. The British bank, which garners more than a third of its global revenue from the financial centre, has endorsed a controversial, Beijing-imposed national security law in the city, inviting the ire of the current US administration.
On the strategy front, Quinn has to protect his low-cost deposit franchise by warding off new digital bank licencees in Hong Kong. The challenge will be to make technology investments in consumer banking while also cutting bloated headcount and rotating capital out of the US and Europe, which will see the bulk of reductions as part of the lender’s US$100bil asset disposal target.
In February, the bank announced a plan to slash its workforce by 35,000, or 15%, by 2022.
Even as cost cuts go ahead, what’s unclear is if HSBC can score a big win as a wealth management player in China, competing against the likes of UBS Group AG, Credit Suisse Group AG and Nomura Holdings Inc.
There are other hurdles to its Asia pivot. Come January, HSBC will be free of the three-year deferred prosecution agreement with the US Department of Justice over manipulation of currency values in the past. While shedding the straitjacket should help the bank become more nimble in picking up additional business in South-East Asia, the fintech challenge in the region is now quite strong.
Next year, HSBC will have to contend with two new consumer digital banks in Singapore. What’s more, India’s Covid-hit economy may not see a quick end to its multi-year investment funk. That’s another important market not performing to potential.
Opening up the “jaws” – revenue growth in excess of cost expansion – will be the first step for HSBC. Pulling last quarter’s 2.9% annualised return on tangible equity to 10%-plus levels will be the hard part.
To get a roar out of Stephen and Stitt, Quinn will have to crack the whip. — Bloomberg
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. Views expressed here are the writer’s own.