Buyback And Profit Rise Show Progress As HSBC Looks East

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After posting a second quarter of revenue growth and with plans to return another $2 billion of cash to investors, departing boss Stuart Gulliver’s six-year turnaround of HSBC Holdings Plc might finally be gathering momentum.

Adjusted revenue and pretax profit rose 4 percent and 13 percent respectively, beating analysts’ estimates, as the bank continued to pump capital into better-returning markets in Asia and earnings at the investment bank surged. The latest buyback means the London-based bank has pledged to repurchase $5.5 billion of shares in the past year, and executives said they’re prepared to do more.

Holdings PLC will buy back another $2 billion in shares and left the door open to return more cash to shareholders as strong returns in its business bolster its capital.

The global bank giant has been generating more profit than it returns in dividends, making it one of Europe's best capitalized banks and leading it to start returning cash last year. HSBC has also freed up capital in its U.S. unit after a multiyears effort to cut down an old consumer loan book there.

HSBC said Monday that net profit for the second quarter rose 57% to $3.87 billion from $2.47 billion in the same period a year earlier. Its profit before tax for the period rose 47% to $5.3 billion.

The U.K. lender said announced buybacks since the second half of 2016 will reach $5.5 billion after the planned $2 billion repurchase.

Chief Executive Stuart Gulliver in an interview said the bank is seeing the fruits of the strategy he laid out in June 2015, including getting more cross-unit business from its 38 million customers. Revenue from such cross-selling rose to $5.9 billion in the second half from $5 billion in the first half of 2016, he said.

HSBC is one of the few remaining so-called universal banks that seeks to boost overall profit and market positions by combining retail banking, commercial banking and investment banking. Many banks backtracked from that broad business model after the financial crisis and narrowed their focus, but HSBC and a few competitors such as J.P. Morgan and Citigroup Inc. say it can still pay off.

"It's an obsession because we need to prove the logic of the network that comes from referrals going between the three global business," Mr. Gulliver said.

"Global banking and markets ought to be taking commercial clients to the high-yield bond market, and retail ought to be introducing high-end premier accounts to the private bank," he said.

For the first half, HSBC is net profit was $7 billion, up 10% from $6.36 billion a year earlier. Its profit before tax rose 5.4% to $10.24 billion.

First-half revenue fell 11% to $26.2 billion from $29.47 billion a year ago due to currency fluctuations, the absence of fair-value movements on its debt and a lack of revenue contribution from operations in Brazil following its sale, the bank said.

Mr. Gulliver said it was too soon to talk about his legacy at the bank, as he nears the end of a near four decade career there. He announced earlier this year that he would retire in 2018, after incoming Chairman Mark Tucker selects a new CEO.

Outgoing Chairman Douglas Flint in the interview said he is most proud of the management team in place at the bank as he prepares to leave his role this fall.

“The key market focus will be on the improved revenue and capital formation trends,” Goldman Sachs Group Inc. analysts wrote in a note Monday. “Investors will undoubtedly focus on what implications this could have for future capital returns.”

The results indicate Gulliver’s revamp of HSBC is starting to bear fruit as the bank starts to grow again after five years of declining revenue. The chief executive officer has spent most of his tenure shrinking and imposing central control over HSBC is vast global network, exiting almost 100 businesses and 18 countries while enduring several costly misconduct scandals. 

“You could argue there is a more focused, logical, cohesive set of businesses that remain and there is absolutely growth” on show at HSBC now, Gulliver said on a call with analysts.

New Chairman Mark Tucker, who will succeed Douglas Flint in October, is already considering internal and external candidates to replace the retiring Gulliver, with an emphasis placed on someone who can continue to galvanize growth at Europe’s largest bank

Shares Up

The bank’s stock jumped 3.8 percent to 771.6 pence at 8:15 a.m. in London to the highest price since May 2013. The shares have risen 56 percent in the past year.

“We’ve got revenues heading in the right direction across all our major businesses and regions” and are in a “very strong capital position,” HSBC is Finance Director Iain Mackay said in Bloomberg Television interview with Manus Cranny.

With most banks in Europe slashing or eliminating their dividends to fund major restructuring programs, HSBC has been one of the few to consistently pay out since the financial crisis, distributing more than $20 billion since June 2015 alone. New capital regulations have also depressed shareholder payouts as banks stockpile cash to swell their loss-absorbing buffers. 

HSBC has reached the end of this capital-building process after boosting its common equity Tier 1 ratio to 14.7 percent from 14.3 percent at the end of March, above its target range of 12 percent to 13 percent.

More Buybacks?

“We will maintain the dividend” and “you can see that we are more than prepared to use buybacks to manage our capital actively,” Gulliver said in a telephone interview. “We’ll use buybacks if we find that we have surplus capital beyond what we think we can deploy profitably in the business in an accretive way and beyond the buffers that we think we may need.”

Mackay has previously said as much as $8 billion could be repatriated from its U.S. operations and a portion of this would be allocated to buybacks. HSBC North American unit passed a Federal Reserve stress test in June, clearing the way for more than $3 billion of capital to be returned to shareholders, analysts said at the time.

Profit at its three biggest units increased, led by a 31 percent jump in Global Banking and Markets, which houses the investment bank. A 16 percent gain in income from services such as debt and equity underwriting and merger advice offset a 6 percent decline in the trading businesses, where rates and credit suffered a bad quarter across the industry.

“The shape of our global banking and markets business is somewhat different than some of the others,” Gulliver said. “A large chunk of it is shaped towards corporates not financial institutions and obviously corporates have to do things every day irrespective of whether markets are good, bad or indifferent, so they are far more stable and predictable.”

More Investment

In Asia, where the bank makes the vast majority of its earnings and is redeploying billions of dollars of investment, second-quarter pretax profit rose 2 percent to $3.8 billion. Earnings in Europe surged 62 percent on the back of the better-then-expected investment bank performance.

The bank delivered on some key metrics, but missed on others. Revenue rose faster than costs -- a measure the bank calls jaws -- which management has identified as a strategic issue to address. Adjusted jaws was at 1.6 percent though the bank’s return on equity remained below the bank’s target of more than 10 percent, coming in at 8.8 percent for the first half.

The bank also took another $89 million charge for the payment protection insurance scandal after the deadline for customer compensation claims was extended. Barclays Plc and Lloyds Banking Group Plc each set aside 700 million pounds ($918 million) for PPI last week.

The firm’s pretax profit rose 13 percent to $6 billion, exceeding the $5.5 billion average estimate of five analysts compiled by Bloomberg. Revenue in the quarter rose 4 percent to $13.2 billion, also beating analyst forecasts.