HSBC Holdings released its first quarter (1Q) 2020 earnings, highlighting the impact of the coronavirus disease (COVID-19) pandemic on the company and its customers.
The company’s’ group chief executive Noel Quinn said, “The economic impact of the COVID-19 pandemic on our customers has been the main driver of the change in our financial performance since the turn of the year. The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax compared with the same period last year.”
“HSBC has always been there for our customers in times of crisis, and we are working hard to support them during this unprecedented period of disruption. We do so from a position of strength, with robust levels of capital, funding and liquidity. The market-specific support measures that we are offering our personal and business customers have had strong take-up, and we remain responsive to their changing needs. We are also working closely with governments around the world to channel fiscal support to the real economy quickly and efficiently,” Quinn added.
In conclusion, Quinn also said, “I take the well-being of our people extremely seriously. We have therefore paused the vast majority of redundancies related to the transformation we announced in February to reduce the uncertainty they are facing at this difficult time. We continue to press forward with the other areas of our transformation with the aim of delivering a stronger and leaner business that is better equipped to help our customers prosper in the recovery still to come.”
Financial performance (vs. 1Q19)
Reported profit before tax was down by 48% to $3.2 billion from higher expected credit losses and other credit impairment charges (ECL) and lower revenue. The reduction primarily reflected the global impact of the COVID-19 outbreak and weakening oil prices.
Reported revenue was down by 5% as a result of adverse market impacts in life insurance manufacturing and adverse valuation adjustments in global banking and markets (GB&M), offsetting a resilient revenue performance, notably in Asia, global markets, retail banking and global private banking (GPB).
The net interest margin (NIM) of 1.54% was down to 2 basis points (bps) from 4Q19 and down to 5bps from 1Q19. HSBC expects material downward pressure on NIM in future quarters as they incur the full impact of 1Q20 market interest rate reductions.
Reported ECL increased by $2.4 billion to $3 billion due to the impact of COVID-19 and weakening oil prices on the forward economic outlook and a significant charge related to a corporate exposure in Singapore. Allowance for ECL increased from $9.2 billion at 31 December 2019 to $11.1 billion at 31 March 2020.
During the quarter, lending increased by $41 billion and deposits grew by $47 billion on a constant currency basis. Lending and deposit growth included the effects of corporate customers drawing on existing and new credit lines and re-depositing these to increase cash balances. Deposit balances also reflected continued growth in retail banking and wealth management (RBWM).
Reported operating expenses was down by 5% and adjusted operating expenses was down by 3%, despite continued investment, due to lower performance-related pay and reduced discretionary costs.
The common equity tier 1 (CET1) capital ratio was 14.6% (4Q19: 14.7%), including the impact of the cancellation of the final dividend in respect of 2019. Liquidity coverage ratio, on the other hand, was 156% (4Q19: 150%) and the deposit surplus – the excess of deposit balances over lending balances – was over $400 billion.
The outlook for world economies in 2020 has substantially worsened in the past two months. The impact and duration of the COVID-19 crisis will likely lead to higher ECL and put pressure on revenue due to lower customer activity levels and reduced global interest rates.
HSBC plans to reduce operating expenses to partly mitigate the reduction in revenue and intends to continue to exercise cost discipline, while maintaining strategic investment. These factors are expected to lead to materially lower profitability in 2020, relative to 2019.
HSBC has temporarily delayed parts of its transformation, including some elements of its cost and risk-weighted asset (RWA) reduction programme, and expects restructuring costs for 2020 to be lower than what was indicated in its 2019 annual results.
The company also expects mid-to-high single digit percentage growth in RWAs in 2020, including as a result of the effects of negative credit rating migration movements, impacting their CET1 ratio.
HSBC will continue to assess the impact of the COVID-19 crisis and review their financial performance and business plan accordingly. They will also assess the appropriateness of their medium-term financial targets during that period, and will review dividend policy at, or ahead of, their year-end results for 2020.
Re-disseminated by The Asian Banker