HSBC India profit crosses $1 bn in 2019, third-most profitable in Asia

HSBC India’s profit crossed $1 billion in the fiscal year ended December, the bank’s annual report shows. Profit before tax for the full year was $1 billion against $825 million in 2018.

The global banking and markets segment contributed to $466 million in profits, against $387 million in 2018.

The retail banking and wealth management segment of the bank contributed to $48 million, against $20 million in 2018. Commercial banking for HSBC India resulted profits of $181 million, and the corporate centre yielded profit of $311 million.

In Asia, India contributed the third-most profit for the bank after Hong Kong ($12.049 billion) and mainland China ($2.877 billion).

HSBC misses third quarter profit estimates; drops profitability goal

HSBC Holdings Plc posted profit that missed analysts’ expectations, abandoned a key target for returns and flagged “significant” restructuring charges as it contends with a worsening global outlook.

Europe’s largest lender, reporting results for the first quarter since the ouster of former chief John Flint, said adjusted pretax profit fell 12 per cent to $5.3 billion. HSBC also walked away from a target for return on tangible equity of more than 11 per cent in 2020, even as it credited operations in Asia with holding up despite challenges in the region.

The stock slumped.

It all adds up to a bigger-than-expected challenge for acting Chief Executive Officer Noel Quinn, who took over in August. While Quinn stopped short of providing details about the planned restructuring, his comments indicate HSBC is getting ready to make steep cuts in underperforming businesses in Europe and the US.

“We suspect that a deferral of details of headcount and cost cuts are because management has had to return to the drawing board for more radical surgery in both Europe and the U.S.,” said Bloomberg Intelligence senior banking analyst Jonathan Tyce.

HSBC shares were down 2.1 per cent at 2 p.m. in Hong Kong, having traded higher in the morning session before the report.

Quinn’s Retrenchment

Quinn, who’s signaled he wants the top job on a permanent basis, has been developing plans for a series of retrenchments. The bank may partially exit stock trading in some developed Western markets, and will attempt to sell its French retail bank, a move that could remove as many as 8,000 staff from the payroll, people familiar with the matter have said.

“Having a strong presence in both continental Europe and the U.S. is important to our bank and we will retain a presence in both of those markets -- but we need to reshape that presence,” Quinn said in an interview. He declined to provide details.

HSBC’s third-quarter adjusted profit trailed a company-compiled analyst consensus of $5.7 billion. Here are some other highlights from the earnings report:

Third-quarter adjusted revenue fell 2 per cent to $13.3 billion

Annualized tangible return on equity of 6.4 per cent for the quarter

Nine-month positive so-called Jaws of 2.2 per cent, meaning revenue outpaced costs

Third-quarter adjusted expected credit losses jumped to $883 million, from $545 million in the previous three months

Hong Kong Fears

HSBC, citing a more challenging revenue environment, said it will “rebalance our capital away from low-return businesses.” That may result in “significant” charges in the fourth quarter and beyond. Those may be related to writing down goodwill in parts of the Europe business as well as job cuts and some investment spending, Chief Financial Officer Ewen Stevenson said.

HSBC may provide more detail when it reports full-year earnings in February.

The firm makes most of its money in Greater China and is heavily exposed to turbulence in the region -- yet it said earnings there have been resilient. More than four months of street protests in Hong Kong have unnerved some customers while a confidence-sapping trade war with the U.S. has dragged on China’s economic growth.

In Hong Kong -- a market that’s a key driver of HSBC’s earnings -- adjusted pretax profit inched up 1 per cent in the quarter to $3 billion. That may provide some relief for investors who have feared the unrest would eat into business there. However, the bank also flagged a credit charge of $90 million to reflect a deteriorating economic outlook in the city.

“Overall we are pretty comfortable with our credit positions in Hong Kong,” Stevenson said. “The one area we are watching more closely than others is just the smaller end of SMEs,” he said, referring to small- and medium-sized companies.

Simplify, Execute

Comments from Hong Kong officials and economic indicators released in the past weeks paint a picture of a rapidly worsening situation in the Chinese territory. Few global companies have tied their fortunes as much to Hong Kong as HSBC, which wants to capitalize on closer economic ties with mainland China.

More broadly, Quinn stressed the need to simplify HSBC’s organization and improve the “pace of execution” -- issues that dogged predecessors who tried to put their stamp on a sprawling lender with almost 240,000 employees.

The emphasis on cost cuts has been reinforced by Chairman Mark Tucker, who recently told some employees the bank needs to improve its return on capital, according to an internal briefing note seen by Bloomberg. In a recent meeting, he highlighted the need for more cuts, according to the briefing note.

HSBC-backed tech startup Serai aims to become LinkedIn of global trade

In a first of its kind initiative, HSBC Holdings Plc is backing the launch of a technology startup that aims to connect small-and-medium-sized manufacturers with component suppliers in different parts of the world as part of its trade banking push.

Hong Kong-based Serai, which is a wholly-owned subsidiary of Europe's biggest bank by assets, started formal operations last week, and is part of HSBC Chief Executive John Flint's plan to invest $15-$17 billion by 2020 on technology to boost growth.

"Navigating international markets as a small-and-medium-sized company is still a nightmare. And the real pain point is business-to-business (transactions)," said Vivek Ramachandran, chief executive of Serai.

"So, if you have got Facebook for your personal network, LinkedIn for your professional network, Serai is for your company," said Ramachandran, who previously worked at HSBC's commercial banking unit for more than three years.

Serai is the first investment by HSBC in a non-banking technology startup, and could help the London-headquartered lender, which makes the bulk of its revenue in Asia, access new clients for its banking services.

Global banks are boosting tech investments for trade and transaction banking - the workaday business of financing trade, managing cash and facilitating payments - amid growing competition and a shift in cross-border supply chains.

Details of HSBC's investments in Serai were not disclosed.

Ramachandran said the technology platform would initially leverage HSBC's trade banking client network globally, and would expand the coverage later to include manufacturers and suppliers who are not the bank's existing customers.

Serai would also make small loans to some of the Hong Kong-based small firms to finance their purchases, with plans to launch full-fledged financing solutions and credit insurance later by third-parties, he said.

"The idea is to create a platform where buyers and sellers come together," Ramachandran said. "You can make connections, and then over time you can access a range of solutions."

Investors should forget white noise like polls, pad up for bull run: HSBC

Investors should forget white noises such as elections and trade wars, and buckle up for the next bull run, HSBC has said in a note.

“Many of the elements required for a sustained bull run are now in place. Sectors that have done well in past bull markets — such as banks, and some recent laggards, consumer discretionary, metals, energy and real estate — look well positioned,” the brokerage said in a note authored by analysts Amit Sachdeva, Anurag Dayal, and Herald Van der Linde.

HBSC has analysed key drivers for Indian equities over the past 20 years and applied it to the current state of the market. India has seen five bull markets, four bear markets, and six periods of temporary weakness over the past two decades. Our verdict is that most of the necessary elements are now in place for the start of a bull run, says HSBC, which recently upgraded its stance on the Indian markets from “neutral” to “overweight”.

“Valuations are well within the boundaries of the peaks and troughs of past bull and bear cycles. The earnings outlook for FY19 and FY20 is the highest in the region. Macro indicators, such as inflation, GDP growth, bond yields, and crude oil prices, also paint a positive picture,” said the note.

Last year, the Indian market averted entering the bear territory. The benchmark Nifty came off as much as 15 per cent between September and October. After bottoming out in October, the 50-share index is currently up 13 per cent from 2018 lows.

HSBC has listed several reasons behind improved sentiment towards domestic equities. It says inflation has been persistently low and is expected to remain stable, which would warrant another rate cut by the Reserve Bank of India in April. Also, India’s economic growth will remain healthy and among the fastest in the region.

On the global front, US bond yields have softened significantly and crude oil prices are “within the tolerance level,” it says.

In the past, rising bond yield and crude prices had led to turmoil in the Indian market. HSBC says India’s valuations are no longer excessive and most sectors are trading well below their five-year average. The benchmark Nifty currently trades at about 17 times its estimated one-year forward earnings.

Also, on the back of tepid flows over the past two years, the Indian markets are “quite under-owned by foreign institutional investors,” it points out. HSBC is the most bullish on the financial sector with Axis Bank, IndusInd Bank, HDFC Bank and Bajaj Finance being the key picks.

“Banks have outperformed almost every time the market has moved out of a bear market,” it says.

Besides financials, consumer discretionary (favoured stocks include Asian Paints, Kajaria Cements and Jubilant Foodworks); real estate (Godrej Properties and Prestige Estates); consumer staples (Avenue Supermarts and ITC); and energy (Gail and HPCL) are among the sectors the brokerage is positive on.

HSBC, however, has stated that the bull market prognosis is its non-consensus view. Also, there are key risks to the assumption.

“The deteriorating macro picture, such as a steep rise in inflation, any large-scale escalation in geopolitical tensions, a slowdown in global growth, or a sharp rise in crude prices,” are key risks, it says.