Dropping the pounds

HSBC stuck on a treadmill, but getting fitter

HSBC may be stuck on a treadmill, but at least it's getting fitter. The global banking giant's underlying net profit rose 10 per cent in the third quarter, even though income was flat. Lower costs, fewer bad loans and the absence of big regulatory fines helped. It's a diet that should continue to deliver better dividends whatever happens to the world economy.

Most big banks are at the mercy of forces beyond their immediate control: central bank money printing, demands for higher capital and legal woes hanging over from the financial crisis. HSBC is by no means immune. Its deposit-heavy balance sheet - only three of the four dollars it takes in from customers are currently lent out - means low interest rates are more burden than benefit. Meanwhile, tinkering by UK regulators prevents HSBC from being able to say for sure that its strong-looking capital ratio, now at 10.6 per cent assuming a full implementation of Basel III rules, is good enough.

Third-quarter numbers also benefited from two windfalls: lower fines and fewer bad debts. In the same period last year, the bank forked out around $1.5 billion in fines and compensation to customers. This time the bill was $750 million. Underlying provisions for bad loans shrunk by four per cent year-on-year as the outlook in the United States and Europe improved slightly, while the bank avoided stressed corporate borrowers in countries like Indonesia and India.

Yet, HSBC can also help itself with cost-cutting. Its annualised cost base is now $4.5 billion lower than when Chief Executive Stuart Gulliver started slimming down the bank in 2011. There's more to come: Gulliver has promised to lose another $2 billion to $3 billion in the coming three years.

This leaner HSBC reckons it can continue to improve its dividend even if regulators raise the bar on capital ratios. It also plans to ask shareholders for permission to buy back the shares it issues each year as scrip dividends. At current levels, that would imply distributing up to a further $3 billion in cash to shareholders. As HSBC gets thinner, investors' wallets should stay fat.