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HSBC Q2 Pre-Tax Earnings Improve as Revenues Rise, Costs Fall

Zacks Equity Research

HSBC Holdings HSBC recorded second-quarter 2019 pre-tax profit of $6.2 billion, up 4% year over year. This increase was due to rise in revenues.

During pre-market trading, the company’s shares lost 2.5% on the NYSE. Notably, the actual picture will emerge after the full-day’s trading session.

Results benefited from an improvement in revenues. Moreover, a slight decline in operating expenses acted as a tailwind.

Revenues Improve, Expenses Decline

Adjusted total revenues of $14.1 billion grew nearly 3% year over year. This upswing reflects higher net interest income, partially offset by a decline in net fee income.

Adjusted total operating expenses declined marginally from the prior-year quarter to $8.1 billion.

Quarterly Performance by Business Lines

Retail Banking and Wealth Management: The segment reported $1.6 billion in pre-tax profit, down 6.2% year over year. This decline was due to higher expenses, partly offset by rise in revenues.

Commercial Banking: The segment reported pre-tax profit of nearly $2 billion, down 2.7% from the year-ago quarter. This decline was due to rise in operating expenses, partly offset by higher revenues.

Global Banking and Markets: Pre-tax profit of $1.1 billion for the segment decreased 43.9% from the prior-year quarter. This decrease primarily resulted from higher operating expenses and lower revenues.

Global Private Banking: Pre-tax profit for the segment was $87 million compared with $76 million recorded in the year-ago quarter. The improvement was largely due to higher revenues.

Corporate Centre: The segment reported pre-tax profit of $1.4 billion, up significantly from $170 million reported in the prior-year quarter. Increase in revenues and lower expenses were largely responsible for the improved performance.

Capital Ratios Mixed

Common equity Tier 1 ratio (transitional) as of Jun 30, 2019, was 14.3%, up from 14.2% as of Jun 30, 2018. Leverage ratio was 5.4%, unchanged from the year-ago quarter.

Share Repurchase Update

During the quarter, the company announced that it intends to initiate a share repurchase program with authorization to buy back up to $1 billion worth shares.

Outlook

HSBC expects severance costs in 2019 to be nearly $650-$700 million.

The company continues to remain on track to achieve return on tangible equity above 11% in 2020. However, with less chance of near-term rise in interest rates by the Fed, the company no longer expects to achieve return on tangible equity of 6% in the United States by 2020.

Change in Leadership

Concurrent with the earnings release, it was announced that John Flint has stepped down as the CEO of the company. Flint remained CEO for nearly 1.5 years after joining the company in 1989.

Now, Noel Quinn, the chief executive of global commercial banking has been asked to take on the responsibility as the company’s interim CEO and join the board as an executive director. However, his final appointment is subject to regulatory approval.

Our Viewpoint

By disposing of unprofitable/non-core operations, HSBC has been successful in enhancing efficiency. Moreover, its initiatives to improve its market share in the U.K. and China will likely support financials over the long term. However, weak European economy, uncertainty related to the impact of Brexit on financials and litigation expenses will continue to curb the bank’s near-term growth.

HSBC Holdings plc Price, Consensus and EPS Surprise
 

HSBC Holdings plc Price, Consensus and EPS Surprise

HSBC Holdings plc price-consensus-eps-surprise-chart | HSBC Holdings plc Quote

Currently, HSBC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Foreign Banks

Barclays BCS reported second-quarter 2019 net income attributable to ordinary equity holders of £1.03 billion ($1.32 billion). This reflects a decline of 19% year over year.

Marred by significant restructuring costs, Deutsche Bank DB reported second-quarter 2019 net loss of €3.15 billion ($3.54 billion) against net income of €401 million in the year-ago quarter. Also, the German lender incurred loss before taxes of €946 million ($1.06 billion).

ICICI Bank’s IBN first-quarter fiscal 2020 (ended Jun 30) net income was INR19.08 billion ($276 million) against net loss of INR1.2 billion ($17 million) in the prior-year quarter.

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