HSBC earnings hurt by market volatility

HSBC Holdings PLC said market volatility in the beginning of 2016 crimped its performance as it reported a 18.2 percent decline in net profit in the first quarter of this year.

The British bank has been grappling with a falling share price and concerns from investors over its strategy in Asia. HSBC’s share price on the Hong Kong stock exchange is down about 32 percent from a year ago. Shares in Hong Kong on Tuesday rose by as much as 1.3 percent to HK$52.40, recovering from a 1.4 percent loss before the earnings release.

“Our first quarter performance was resilient in tough market conditions that affected the entire banking sector,” said Chief Executive Stuart Gulliver. “Profits were down against a very strong first quarter of 2015, but we increased market share in many of the product areas that are critical to our strategy.”

The bank said Tuesday that first-quarter net profit fell to US$4.3 billion from US$5.26 billion a year ago. Revenues fell 5.8 percent in the first quarter to US$14.98 billion, mainly as unpredictable markets dented client activity in its global banking and markets unit, and life insurance brought in lower revenue.

Loan impairment charges totaled $1.16 billion in the first quarter, up from $570 million a year earlier, and were driven by the oil and gas, and metals and mining sectors, as well in countries including Brazil, Canada and Spain, the bank said.

There were some bright spots: The bank said it increased market share in key areas including Asian debt capital markets, China mergers and acquisitions and syndicated lending in Asia. HSBC has joined the top ranks of takeover deal makers in China over the past year. The bank is advising China National Chemical Corp. on its $43 billion takeover of Swiss pesticides and seed maker Syngenta AG, China’s biggest overseas deal ever.

Meanwhile, revenues from current and savings accounts grew in Hong Kong, with net interest income up 10 percent from a year earlier to $1.82 billion.

Once a sprawling bank across 87 countries, HSBC has exited swaths of businesses across the globe to improve profits and cope with tougher regulations since the financial crisis. Its main regions now are Asia, the U.K. and North America. In February, HSBC decided to stay headquartered in London after considering a return to its original Hong Kong base.

The bank has been hit this year by darkening sentiment toward commodities and emerging markets, two key planks of its business. HSBC executives have said Asia will continue to drive growth for the bank, a strategy that may pay off in the future but is seen as a short-term drag on earnings.

Some investors and analysts have raised concerns about HSBC’s strategy in the Pearl River Delta region, including uncertainty over foreign banks’ ability to compete for lending and deposits against big state-owned banks. HSBC’s ambitions could also be tempered by China’s slowdown and a weaker operating environment in Asia Pacific.

Moody’s Investors Service in March revised to negative from stable its ratings outlook on HSBC, spurred by the ratings firm’s concern that “Hong Kong’s increasing economic and financial linkages with China…give rise to potential negative spillovers” from that country “and ultimately weaker growth.”

Mr. Gulliver acknowledged last month that the share price “isn’t where we want it to be,” and said that keeping costs down and revenue up are big challenges for the bank this year because of weak economic conditions.

He said Tuesday the bank is on track with its cost-savings program and plan to reduce riskier assets on its balance sheet. Operating expenses totaled $8.26 billion in the first quarter, down 7 percent from a year earlier. Excluding an increased credit related to a bank levy charge from the prior year, the bank said “costs were broadly unchanged.”

HSBC “has been cutting costs for more than five years now and there [isn’t] much they can do incremental to current plans in the near term,” analysts at Bernstein Research said in a note on Tuesday after earnings were released.

The bank said Tuesday it faces one final regulatory hurdle–a decision from Brazil’s Competition Agency–before the sale of its Brazil business can be approved. The bank announced last year it would sell its Brazilian business for $5.2 billion.

Source: MarketWatch

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