HSBC (HSBA.L) announced a $2.5 billion share buy-back and pared ambitions to grow dividend payouts and returns as it took pragmatic steps to soothe investors amid slowing growth in its home markets of Britain and Hong Kong.
The lender’s London-listed shares were trading 3.6 percent higher at 0808 GMT (4:08 a.m. ET) after the buy-back took the sting out of a 29 percent drop in January-June pretax profits, which matched analysts’ expectations.
As Britain’s vote to leave the European Union clouds economic prospects and Hong Kong absorbs slower growth in China, HSBC, Europe’s biggest bank, has opted to “remove a timetable” for reaching its targeted return on equity (RoE) in excess of 10 percent by the end of next year. Return on equity at end-June was 7.4 percent.
“Abandoning the timetable for reaching a 10 percent RoE is not pessimistic as much as realistic that interest rates in the U.S. aren’t going up and ‘lower-for-longer’ is brutal for them,” Richard Buxton, CEO of Old Mutual Global Investors, one of HSBC’s 30 largest investors, told Reuters.
Group Chief Executive Stuart Gulliver said the bank had removed the word “progressive” from its guidance on dividend payout plans, as a reflection of tougher market conditions.
“‘Progressive’ was interpreted by everyone as meaning it is going to go up every quarter notwithstanding what is happening in the world, so what we are saying is we are committed to sustain the dividend at the current level,” he told Reuters.
While investors interpreted the new guidance as pragmatic, analysts at Shore Capital said they were “less than convinced” by the management’s pledge to maintain the dividend, noting that both Gulliver and Chairman Douglas Flint are set to step down in the next couple of years.
“With the earnings outlook continuing to deteriorate … a future dividend cut could therefore still be on the cards, especially if a new leadership takes a different view.”
The share buy-back follows HSBC’s disposal of its Brazil unit last month in a $5.2 billion deal.
Gulliver told Reuters HSBC’s core equity ratio would move to 12.6 percent from 12.1 percent at the end of June, following the buy-back, in line with the bank’s target range of 12-13 percent.
The bank could announce further buy-backs up to the value of the entire Brazil disposal in the future, Gulliver said, depending on the global economic outlook next year and beyond.
HSBC’s reserves could be boosted yet further as the bank repatriates capital ‘trapped’ in the United States following the sale of assets from its disastrous 2003 purchase of consumer lender Household.
The core capital ratio in HSBC’s North America business was in the mid-20s and Gulliver said it could remit a ‘material sum’ as dividends to the bank’s London-based holding company, boosting the Group’s capital further.
UK, ASIA SLOWDOWN
Europe’s banking sector, rattled by deteriorating profits caused by record low interest rates, is braced for fresh economic turmoil as Britain’s ponders its future relationship with the EU.
Gulliver said the bank had seen reduced applications for funding from small businesses in Britain following the June 23 referendum, but that the impact of Brexit had otherwise been ‘muted’ so far.
“The fall in profits is pretty much to be expected as indeed is lower guidance on ROE given nigh on zero interest rates,” said Hugh Young, head of equities at Aberdeen Asset Management, a top HSBC shareholder, adding that he believed the management would continue to invest in its business plan as necessary.
HSBC is also grappling with slowing growth in Asia, where first-half profit fell 8 percent and plans to funnel capital from Western businesses into China’s Pearl River Delta region have been pared back.
“Our plans haven’t changed in China… but we are saying the redeployment of capital will take longer,” Gulliver told Reuters, blaming China’s slowing growth and fluctuating currency since the ‘Asia pivot’ strategy was announced last June.