©Reuters. FILE PHOTO: The HSBC Bank logo is seen in this illustration taken March 12, 2023. REUTERS/Dado Ruvic/Illustration/file Photo
By Selena Li and Lawrence White
HONG KONG/LONDON (Reuters) – HSBC Holdings reported a $3 billion charge on its stake in a Chinese bank on Wednesday due to rising bad loans in the world’s second-largest economy, overshadowing a record annual profit.
Shares of the British lender fell as much as 7% in early London trade against a broadly flat index, heading for their worst single-day decline since the outbreak of the COVID-19 pandemic in March 2020, as also investors have noticed higher costs.
The collapse in the stock price occurred despite the bank announcing a new $2 billion buyback, an annual dividend of $0.61 per share and plans to pay a special dividend of $0.21 per share once completed the sale of its Canadian operations.
The negative market reaction, despite record profits and huge payouts, highlights the challenge Asia-focused HSBC faces in meeting investors’ sky-high hopes as it grapples with China’s weaker-than-expected economic recovery .
The bank’s 2023 pre-tax profit jumped 78% to $30.3 billion, but still missed the consensus estimate of $34.1 billion, largely due to China’s unexpected devaluation.
HSBC’s costs also grew 6% in 2023, more than expected, due to the impact of higher-than-expected bank levies in the United States and Britain. It also said costs will rise a further 5% in 2024 as it grapples with inflation as it invests in its businesses.
HSBC’s $3 billion write-down on its stake in the Bank of China Communications (BoCom) is the largest ever taken by a foreign lender, as the country’s property crisis deepens.
The write-down follows a review of likely future cash flows and growth prospects for loans and interest margins, HSBC said.
Chief Executive Noel Quinn, however, said he believes valuations in mainland China’s commercial property market have hit rock bottom.
Quinn said he sees a “progressive, gradual recovery” but that “it will take a few years for the market to make its way through the current challenges.”
Matt Britzman, equity analyst at Hargreaves Lansdown, said mainland China remains a question mark for HSBC and that its prospects appear slightly worse than expected.
“2023 was a strong year for HSBC, but the earnings momentum appears to be coming to an end and things are set to get more challenging from here on,” he said in a note to clients.
CAUTIONARY PERSPECTIVES
Europe’s largest lender said it remains cautious about the outlook for loan growth in the first half of 2024 amid slowing economic growth in many economies where inflation persists.
The bank posted a return on tangible capital (ROTE) of 14.6%, a key performance target, in 2023, below analysts’ forecasts of 17%. It said it will continue to target ROTE in the mid-teens for 2024.
HSBC’s wealth business was a bright spot for the bank, with revenue growing 8% to $7.5 billion, partly boosted by its acquisition of Citigroup’s wealth business in China last year.
The wealth unit – which HSBC has sought to grow, particularly in Asia – also attracted net new invested assets of $84 billion, up from $80 billion in 2022.
HSBC said its bonus pool rose to $3.8 billion from $3.4 billion in 2022, reflecting improved performance, and it will also launch a new variable pay scheme for junior and middle management staff.
CEO Quinn saw his total compensation double in 2023 to $10.6 million from $5.6 million the previous year, as long-term incentives from his 2020 appointment began to accrue, by increasing his variable remuneration.