HSBC getting back to form
HSBC is getting back to form. A sharp fall in impairments at the bank’s U.S. operations, coupled with a strong performance from its investment bank, helped drive a doubling in first-half earnings.
Impairments in the behemoth’s troubled U.S. personal financial services business fell more than 40 percent to $4.6 billion. Declining credit losses in Latin America and Europe were also a big boost to profits.
Lower loan losses will only take HSBC so far. Fortunately, it is also showing growth in the right places. Its investment bank generated revenue of $10.8 billion, the division’s second best performance ever. It only made more money in the heady first half of 2009, when share and bond issues were flying off the shelves and there were bumper profits to be made on the trading floor. But HSBC is now making more money in investment banking than it did before the crisis. Few banks can make that claim.
Meanwhile, the top line is growing nicely at the Asian commercial businesses and falling sharply in U.S. retail which is being wound down. This constitutes a healthy rebalancing of its activities towards higher growth markets.
Still, there is only so much HSBC can do on its own. While the low interest rate environment is making it easier for borrowers around the world to pay off their debts, it is acting as a drag on HSBC’s earnings. The net interest margin has fallen to 2.8 percent, from 3.1 percent in the first half last year.
The profit rebound allowed HSBC to increase its Tier 1 capital ratio by 70 basis points, despite paying out around $2 billion in dividends. That hefty capital base doesn’t flatter HSBC’s profitability. At 9.3 percent, its return on equity is well below its 15-19 percent target. If the U.S. business moves back into profit and other trends continue, HSBC should be able to creep into its target range. But getting to the middle or top will be tough.