HSBC Will Struggle to Regain Its Edge -- Heard on the Street
October 27 2020 - 9:59AM
Dow Jones News
By Rochelle Toplensky
Even as China has mounted a stronger fightback against Covid-19
than its Western peers, China-focused HSBC has lost its
exceptionalism among European banks. Winning it back won't be as
easy as Tuesday's share-price jump might suggest.
The London-headquartered bank announced better-than-expected
third-quarter results. Reduced interest revenue was offset somewhat
by lower credit losses than in the first half of the year, strong
results from life insurance, and a pickup in trading as seen at the
big Wall Street banks. Chief Executive Noel Quinn said he is more
optimistic this quarter and, importantly, raised the prospect of
restarting dividend payouts next year.
HSBC had been a reliable dividend payer for decades. Like all
U.K.-regulated banks, though, it was forced by British officials to
suspend its payout this year. Its sizable base of individual
investors in Hong Kong were livid. The lender earns most of its
revenue and profit in Asia.
With a solid 15.6% core equity ratio at the end of the third
quarter, HSBC hopes to restart dividends next year, but payouts
will be "conservative" and subject to U.K. regulators' approval.
Buybacks aren't likely anytime soon.
Despite rising 7% in morning trading Tuesday, the shares are
still down more than 40% this year, massively trailing the 12% drop
in the Hong Kong market's Hang Seng Index. Historically, the stock
enjoyed a premium over European rivals because of its exposure to
Asian growth, but it has faded in recent years.
Geopolitical tensions, which seem unlikely to end with next
week's election, have made it increasingly difficult for the lender
to find a path that keeps both East and West happy. China's
stronger security stance in Hong Kong and the Huawei fracas have
been particular flashpoints, raising the specter of the bank being
labeled an unreliable entity by Beijing.
HSBC's other challenges are more familiar to bank investors.
This year, risks around the economic impact of the pandemic and
unwinding government support have taken center-stage. Brexit is
another minefield: The lender faces as much as $1 billion in
additional credit losses if the U.K. fails to reach a trade deal
with the European Union, says Chief Financial Officer Ewen
Stevenson.
Like all banks, HSBC also must adapt to persistent ultralow
interest rates. It plans to cut costs using digital technology and
raise fee-based income by extending its insurance, wealth and
asset-management businesses beyond Hong Kong into China and South
Asia. The company is eight months into a three-year overhaul to
pivot even more toward Asia and cull European and U.S. operations.
It has promised an update in February.
The bank's performance through what Mr. Quinn characterized as
"challenging times" hasn't been bad. But Asian connections that
once were a path to growth are now a mixed blessing. Given the
simmering China-U.S. tensions, that doesn't seem likely to change
-- however soon HSBC gets back to paying dividends.
Write to Rochelle Toplensky at rochelle.toplensky@wsj.com
(END) Dow Jones Newswires
October 27, 2020 10:44 ET (14:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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