After posting a second quarter of revenue growth and with plans to return another $2 billion of cash to investors, departing boss Stuart Gulliver’s six-year turnaround of HSBC Holdings might finally be gathering momentum.
Adjusted revenue rose 4%, and pretax profit rose 13%, beating analysts’ estimates, as the bank continued to pump capital into better-returning markets in Asia and earnings at the investment bank surged. The latest buyback means the London-based bank has pledged to repurchase $5.5 billion of shares in the past year, and executives said they are prepared to do more.
The results indicate Gulliver’s revamp of HSBC is starting to bear fruit as the bank starts to grow again after five years of declining revenue. The chief executive has spent most of his tenure shrinking and imposing central control over HSBC’s vast global network, exiting almost 100 businesses and 18 countries while enduring several costly misconduct scandals.
“You could argue there is a more focused, logical, cohesive set of businesses that remain and there is absolutely growth” on show at HSBC now, Gulliver said on a call with analysts.
Meanwhile, HSBC faces as much as $300 million in legal and relocation fees as it prepares to move 1,000 staff to Paris, in one of the first indications of the cost of Brexit to the U.K.’s financial industry.
It took a $4 million charge in the second quarter for “costs associated with the U.K.’s exit from the EU,” which Gulliver said could rise to between $200 million and $300 million. HSBC plans to relocate about a fifth of its London-based investment bankers to its offices in France to maintain uninterrupted access to the European Union’s single market.
“The total is effectively the cost of the transition across to France,” Gulliver said during a call with reporters on Monday. “The revenue we think is at risk from Brexit is about $1 billion, but we don’t expect to lose it” because moving staff will protect those businesses affected.
New Chairman Mark Tucker, who will succeed Douglas Flint in October, is already considering internal and external candidates to replace the retiring Gulliver, with an emphasis placed on someone who can continue to galvanize growth at Europe’s largest bank.
“We’ve got revenues heading in the right direction across all our major businesses and regions” and the company is in a “very strong capital position,” HSBC’s Finance Director Iain Mackay said in Bloomberg Television interview.
With most banks in Europe slashing or eliminating their dividends to fund major restructuring programs, HSBC has been one of the few to consistently pay out since the financial crisis, distributing more than $20 billion since June 2015 alone. New capital regulations have also depressed shareholder payouts as banks stockpile cash to swell their loss-absorbing buffers.
HSBC has reached the end of this capital-building process after boosting its common equity Tier 1 ratio to 14.7% from 14.3% at the end of March, above its target range of 12% to 13%.
“We will maintain the dividend,” and “you can see that we are more than prepared to use buybacks to manage our capital actively,” Gulliver said in a telephone interview. “We’ll use buybacks if we find that we have surplus capital beyond what we think we can deploy profitably in the business in an accretive way and beyond the buffers that we think we may need.”
Mackay has previously said as much as $8 billion could be repatriated from its U.S. operations and a portion of this would be allocated to buybacks. HSBC’s North American unit passed a Federal Reserve stress test in June, clearing the way for more than $3 billion of capital to be returned to shareholders, analysts said at the time.
Profit at its three biggest units increased, led by a 31% jump in global banking and markets, which houses the investment bank. A 16% gain in income from services such as debt and equity underwriting and merger advice offset a 6% decline in the trading businesses, where rates and credit suffered a bad quarter across the industry.
“The shape of our global banking and markets business is somewhat different than some of the others,” Gulliver said. “A large chunk of it is shaped towards corporates not financial institutions and obviously corporates have to do things every day irrespective of whether markets are good, bad or indifferent, so they are far more stable and predictable.”
In Asia, where the bank makes the vast majority of its earnings and is redeploying billions of dollars of investment, second-quarter pretax profit rose 2%to $3.8 billion. Earnings in Europe surged 62% on the back of the better-then-expected investment bank performance.
The bank delivered on some key metrics, but missed on others. Revenue rose faster than costs — a measure the bank calls jaws — which management has identified as a strategic issue to address. Adjusted jaws was at 1.6% though the bank’s return on equity remained below the bank’s target of more than 10% coming in at 8.8% or the first half.
The bank also took another $89 million charge for the payment protection insurance scandal after the deadline for customer compensation claims was extended. Barclays and Lloyds Banking Group each set aside 700 million pounds ($918 million) for PPI last week.
The firm’s pretax profit rose 13% to $6 billion, exceeding the $5.5 billion average estimate of five analysts compiled by Bloomberg. Revenue in the quarter rose 4%to $13.2 billion, also beating analyst forecasts.
