May 4, 2018 / 11:25 AM / 24 days ago

Breakingviews - Asia shoulders too much of HSBC's burden

LONDON (Reuters Breakingviews) - HSBC used to style itself as “the world’s local bank.” It abandoned the tagline after rounds of cost-cutting put paid to global ambitions. New Chief Executive John Flint has inherited a shrunken version of the lender, but the latest results make clear it remains both sprawling and yet overwhelmingly reliant on Asia.

HSBC headquarters is seen at the financial Central district in Hong Kong, China September 6, 2017. REUTERS/Bobby Yip - RC1C7CE478A0

A $2 billion share buyback programme that accompanied first-quarter financial figures looks like a sop to shareholders. Underlying pre-tax profit tumbled 3 percent from a year earlier, to $6 billion. Fortunately for HSBC, it can afford the stock repurchases thanks to a healthy capital cushion. Its common equity Tier 1 ratio clocks in at 14.5 percent.

Flint said his main challenge is to “grow safely”. It’s a reasonable goal for a bank scarred by the financial crisis, but only $400 million of HSBC’s higher gross operating expenses fell under expansion initiatives, with the balance of $600 million chewed up by compliance and other items.

Asia shouldered much of the burden again. The region’s bottom line before taxes grew by nearly a fifth, accounting for about 80 percent of HSBC’s pre-tax profit. Slowly but steadily rising U.S. interest rates should keep boosting net interest margins. A modest 25-basis-point increase in American and Hong Kong dollar rates alone would add some $400 million to group revenue.

More concerning is the performance in North America and Europe, where underlying pre-tax profit fell 16 percent and 72 percent, respectively, in the three months ending March 31. Accounting changes in the value of HSBC’s debt were a factor. Both continents are also gateways to Asia for clients. Lower earnings are nevertheless worrisome given regional economic improvement.

Banks in Mexico and Argentina add to an impression of geographic overreach with limited benefits. Their value to an Asia-focused franchise isn’t obvious. The operations might be better owned by rivals zeroed in on South America.

At least Flint can tackle such challenges from a position of strength at this summer’s strategic update. After the meagre first quarter, HSBC shares are trading at a healthy 1.3 times tangible book value. That premium should sustain so long as the bank’s Asian engine keeps humming.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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