HSBC, Standard Chartered give investors glimpses of their cost cuts and bets on Asia when they post first-quarter results this week
Investors will be watching this week to see whether historically low interest rates gash the bottom lines of Hong Kong's banks in the first quarter as economic conditions in the city begin to normalise.
HSBC and Standard Chartered are both based in London, but both count Asia as the biggest contributor to their earnings. Their financial results this week will offer investors a glimpse into the efficacy of their efforts to trim costs and put greater emphasis on rising affluence in the region, anchored by China's expanding economy while the rest of the world remains stuck in the coronavirus pandemic.
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HSBC and Standard Chartered should show a positive progression in their first-quarter revenue from the second half of last year, according to Morgan Stanley's analyst Nick Lord. Quarterly revenue is forecast to decline 3.5 per cent at HSBC from a year earlier, and 10 per cent at Standard Chartered, partly because of continued pressure on net interest margins, he said.
Net interest margin "should stabilise [quarter on quarter], while loan growth is expected to be solid, and markets and wealth revenues should hold up well after a strong 2020," Lord said in an April 14 research note. "Credit costs are forecast to fall vs. recent quarters, but still remain elevated vs. 2019 levels."
HSBC's net interest margin declined by 26 basis points to 1.32 per cent over the course of 2020, while it fell 30 basis points to 1.24 per cent at Standard Chartered last year.
That is weighing on the ability of banks to make money from products traditionally tied to interest rates, such as lending. As a result, banks are putting a greater focus on fee-generating products and wealth management, particularly in Asia.
HSBC's chief executive Noel Quinn said in February that the bank sped up its shift to non-interest, fee-generating products and accelerated its cost cutting in 2020 because of lost income in a "dramatically" changing interest rate environment.
"We lost around US$5.3 billion of net interest income on more than 2 percentage points of [return on tangible equity] and we do not expect rates to rebound any time soon," Quinn said on a February 23 analyst call
HSBC is expected to report pre-tax profit of US$4.3 billion in the first quarter, including a 14 per cent decline in net interest income and a more modest US$1.1 billion in provisions for expected credit losses, according to a consensus estimate compiled by the bank.
Despite the expected pressure on net interest income, that would represent a 34 per cent increase in pre-tax profit from US$3.2 billion in the same period in 2020.
The lender set aside US$8.8 billion for expected credit losses in 2020, including US$3 billion in last year's first quarter, in anticipation of potential soured loans because of the Covid-19-induced slowdown.
Fitch Ratings is forecasting Hong Kong's economy to recover and grow at 4.5 per cent in 2021, a positive sign for banks in the city that could decrease pressure on parts of their loan books. The city's economy contracted 6.1 per cent last year, its sharpest annual decline on record.
"Property prices began to post gains in early 2021 following modest declines since the emergence of social unrest in mid-2019," Fitch analyst Andrew Fennell said in an April 15 research report.
Any potential spillovers to the city's banks from further property price declines "would be cushioned by low loan-to-value ratios on existing mortgages (generally under 50 per cent on average for major banks) and a low percentage of properties with outstanding mortgages," Fennell said.
Standard Chartered's first-quarter pre-tax profit is expected to rise 11 per cent to US$985 million, with US$317 million in credit impairments, according to a consensus of 15 analysts compiled by the bank. That would represent a 67 decline in credit impairments from a year ago.
Standard Chartered's 8,800-square foot Priority Private Centre at K11 Atelier Victoria Dockside in Tsim Sha Tsui is part of its plan to target the needs of wealthy clients. Photo: Handout alt=Standard Chartered's 8,800-square foot Priority Private Centre at K11 Atelier Victoria Dockside in Tsim Sha Tsui is part of its plan to target the needs of wealthy clients. Photo: Handout>
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