HSBC misses third quarter profit estimates; drops profitability goal

The 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 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.