Saturday, 25 May 2024

Brexit and weaker economic growth hit HSBC's performance

5 min read

By Shenming Wang

HSBC will continue reshaping its business and conduct cost-saving strategies amidst a weak performance in its European, Latin American, and North American businesses.

  • Heightened uncertainty after Brexit, higher regulatory costs, and lower consumer spending and investments affected HSBC’s profitability
  • European Banking Authority’s stress tests confirmed the bank’s capital strength
  • The bank managed to gain market share in key Asian markets

HSBC's profit in the second quarter of 2016 fell 45% to $2.9 billion. The bank reported a pre-tax profit of $3.63 billion in Asia and registered pre-tax losses in its European, Latin American, and North American businesses during the quarter.

Factors that influenced the bank's performance

• Britain’s vote to leave the European Union (EU) in June influenced HSBC's performance. Heightened uncertainty, diminished confidence, lower spending and investments, and higher regulatory costs resulted in a weaker U.K. economic growth, which reduced insurers’ business growth potential and profitability.

• Results of the stress test conducted by the European Banking Authority (EBA) demonstrated HSBC’s continuing capital strength. The Group’s post-stress common equity tier 1 (‘CET1’) capital ratio, under the fully loaded capital definition, economic scenarios and methodology prescribed for the exercise, will reach a low point of 8.7% in 2017 and will rise to 8.8% by end of 2018.

• The drop in HSBC's profitability was also attributed to diminishing fee income from equities trading in Hong Kong.

Future Looking

• China’s economic slowdown will lessen loan demand, which will cause a surge in bad debts. Adverse investment sentiments will put downward pressure on fee income.

• HSBC will continue reshaping its business and conduct cost-saving strategies. Last year, the bank shed tens of thousands of jobs, sold underperforming businesses, and shrank its global investment banking business.

• HSBC rose over 4% in pre-market trading in the New York Stock Exchange (NYSE). HSBC decided to initiate $2.5 billion share repurchases (following the completion of the sale of its Brazilian unit) and kept dividend payout intact for “the foreseeable future” to cheer investors.

• HSBC US achieved a non-objection to its capital plan, which is comprised of a dividend payment in 2017, as part of the Comprehensive Capital Analysis and Review (CCAR).

• HSBC has also managed to capture value from its network and has gained market share in key Asian markets and businesses. The bank is committed to sustain annual ordinary dividend at current levels for the future.


• 28 June 2016: Moody's Investors Service changed its outlook on the United Kingdom's (UK) banking system to negative from stable
• 17 March 2016: Moody's Investors Service affirmed HSBC Holdings plc's A1 long-term senior unsecured debt rating. Moody's also affirmed the A1 adjusted Baseline Credit Assessment (BCA) and the Aa2 long-term deposit and senior unsecured debt ratings for its main European operating entity, HSBC Bank Plc (HSBC Bank). In addition, Moody's affirmed HSBC France's (HSBCF) A2 adjusted BCA, its A1 long-term deposit rating. and its A2 long-term senior unsecured debt rating.

Latest News on HSBC Plc:

• 1 August 2016: HSBC Holdings Plc (HSBC) Shares went up by 1.14% as it outperformed the S&P 500 for the past four weeks. Buying continued with strong appetite for the stock.

• 26 July 2016: Switzerland planned to give U.S. tax authorities with information about the accounts at HSBC Holdings Plc's Swiss private bank, as part of a tax evasion investigation. The move came after the Internal Revenue Service (IRS) asked Swiss tax authorities for assistance on HSBC Private Bank (Suisse) SA accounts held by Swiss-registered "domiciliary companies" with U.S. beneficial owners between 2002 and 2014.

• 25 July 2016: HSBC Holdings Plc discussed plans to sell its Lebanese business with Beirut-based Blom Bank. Chief executive officer Stuart Gulliver announced a three-year strategy last year to shrink HSBC’s sprawling operations, reduce annual costs by $5 billion, and cut the number of employees by 25,000 .

Keywords: HSBC, EBA, Brexit, Moody's, Stress Test, Quarterly Performance
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