HSBC warns further buybacks ‘unlikely’ as war and slowing Asian growth hit profits

HSBC’s profits fell by more than a quarter in the first three months of the year, as Europe’s largest lender increased reserves for bad loans in response to war in Ukraine and slowing growth in its core Asia markets.

The London-based bank reported profit before tax of $4.2bn for the first quarter, a decline of $1.6bn from the same period in 2021, in part because of a $600mn charge for expected credit losses due to the Russian invasion and a slowdown in the Chinese property sector.

While the profit beat analysts’ expectations for $3.7bn, partly thanks to a rise in global lending volumes, HSBC’s shares declined 2.3 per cent in London on Tuesday. Revenue fell 4 per cent to $12.5bn, falling just short of the $12.7bn forecast.

The additional provisions reverse a trend started last year, when HSBC began cancelling hundreds of millions of dollars in reserves it had set aside for potential pandemic-related loan losses.

Profits were also hit by a surge in Covid-19 cases in HSBC’s home market of Hong Kong, which resulted in muted equity market activity, bank branch closures and a slowdown in the lender’s wealth management division in China, which is at the core of its Asia growth strategy.

“Inevitably if it continues it will have an impact,” said chief financial officer Ewen Stevenson, referring to zero-Covid lockdowns in mainland cities such as Shanghai and Beijing. “[But] we are not talking internally about some fundamental shift in strategy because of what we are seeing at the moment, or a significant deterioration in loan quality.”

HSBC also disclosed that it has $1.3bn of exposure to Russia, including $900mn of local currency deposits, and provisioned $250mn for potential losses from Russian counterparties. Unlike other lenders, HSBC has not exited the country and has about 200 staff there.

“The Russia-Ukraine war continues to have devastating consequences both within Ukraine and beyond,” said chief executive Noel Quinn. “HSBC Russia is not accepting new business or customers and is consequently on a declining trend.

“The vast majority of our business in Russia serves multinational corporate clients headquartered in other countries, and as a global bank, HSBC has a responsibility to help them manage these challenging circumstances.”

Quinn added that the conflict in Ukraine had “exacerbated inflationary pressures” and “increased uncertainty” for the global economic outlook.

Shareholders had been optimistic that rising global interest rates would lead to a surge in earnings at HSBC, which has one of the world’s largest balance sheets and $700bn in surplus deposits.

However, the bank warned that regulatory changes and the need to hedge interest rates caused its crucial capital ratio to fall to 14.1 per cent, a sharp decline from 15.8 per cent at the end of 2021.

With a further hit to come from the costs of the sale of its French retail network, the bank warned that further stock buybacks in 2022 were “unlikely at this stage”.

The potential for higher net interest income through rising rates could “be overshadowed by the renewed concerns on capital build-up”, said Citigroup analyst Yafei Tian. “The cancellation of further buybacks for this year could also be negatively received by the market.”

The lender is in the middle of a multiyear plan that will redeploy $100bn of capital to Asia, trim $4.5bn in costs, cut 35,000 jobs in Europe and the US and invest heavily to become a market leader in wealth management in Asia.

About a year ago, HSBC doubled down on the strategic shift to Asia and retreat from the west. The lender has sold its retail operations in the US and France and is partway through a programme to invest $6bn to expand in Hong Kong, China and Singapore, hiring more than 5,000 wealth advisers in the region.

Shares in HSBC have recovered 85 per cent since hitting a 25-year low in September 2020, weighed down by lockdowns, ultra-low rates and geopolitical tensions. However, they have still lost a fifth of their value in the past three years.

Last year, HSBC’s pre-tax profit rebounded from the initial shock of the pandemic, increasing 115 per cent to $18.9bn for 2021. Annual revenue fell 2 per cent to $49.6bn.

The bank hosts its annual meeting in London on Friday.