HSBC Holdings [HSBA] scored top marks in its Q1 results last Friday (3 May), reporting $14.4bn in adjusted revenue, up 9.2% year-on-year, and a 40% EPS jump to $0.21, in what CFO Ewen Stevenson called a “a very good base to build on” for the rest of 2019.
Shares rose as high as 687p on Friday, before closing the week at 680.5p, up 1.8% from the previous day. During the earnings call, Stevenson said retail banking income had been buoyed by UK and Hong Kong mortgages, while the large-corporate-oriented Global Liquidity and Cash Management segment pushed commercial banking revenues up 11%.HSBC 1-year share price performance, CMC Markets, 07 May 2019
While headline results were “flattered by some favourable items”, Stevenson said, underlying revenue growth “continues to be solid and strongest in the areas we've targeted for growth, particularly Asia”.
The first quarter results vindicated HSBC’s focus on Asia, the region having seen Q4 revenues impacted by US-China trade tension. In the three months to March, Asia revenues rose 7%, while new loans in the region totalled $11bn, up 2% from the same period last year. This was “despite a softer rate and growth environment”, according to the firm.
Dispelling current concerns regarding a slowdown in the cross-border transactions that underpin HSBC’s business, Stevenson said the bank had seen “decent revenue growth” in trade and receivables finance, “on the back of higher margins in Asia and higher balances in the UK”.
Increase in Asia revenues
Meanwhile, the firm is closely observing its UK business ahead of Brexit. “We'll remain vigilant on the UK, where we expect prevailing uncertainty … to continue impacting business and consumer confidence,” said Stevenson. But he told analysts: “In the UK, we do think we are underweight on the asset side, and we do have the ability to grow … On the commercial side, for example, [Brexit] plays to our competitive strength as corporates develop new international relationships.”
Still, it is Asia that offers the biggest opportunities, despite the past few months’ sentiment around China growth. “We are taking share, particularly against Western banks, in Asia,” Stevenson said. “It is a business we've been investing in, and it is a business we're very good at.”
Strong results didn’t just stem from HSBC’s bread-and-butter commercial lending business. The London- and Hong Kong-listed bank has made no secret of its intention to tap into increasingly affluent demographics in Asia, leveraging its base in the Pearl River Delta megalopolis. “Hong Kong is the substantial opportunity on the wealth side both in terms of private banking, affluent banking [and] asset management on the insurance side,” Stevenson said.
And the first quarter did not disappoint on that front. “Q1 [brought] more than the entire net new money of full year '18,” the CFO said. “We think we've been significantly under-punching our weight in the region.
“We think we've been significantly under-punching our weight in the region” - CFO Ewen Stevenson
“A lot of the banks we're competing with cannot bring that mix of ultra-high-net-worth private banking, commercial banking and investment banking together as one complete package with customers. Many of them are either fighting on one leg or two legs, so we do see significant potential in that business.”
Costs and returns
In the company’s full-year earnings, announced in February, HSBC suffered a setback – mostly stemming from a tough Q4 – as “jaws”, or the difference between revenue growth and cost growth, turned negative. This quarter, HSBC was able to make up for that, posting a “very healthy” 6% adjusted jaws.
|PE ratio (TTM)||9.61|
|Operating margin (TTM)||36.01%|
HSBC stock vitals, Yahoo finance, 07 May 2019
“Cost-income jaws are imperfect because while we can control costs, we're obviously not fully in control … of some of the revenue line items,” Stevenson said.
Stevenson said he was “not planning on Q1 being repeatable for the full year”, but added he was “cautiously optimistic for 2019”. And as HSBC’s CET 1 ratio improved 30 basis points to 14.3%, shareholders’ returns look to be relatively well safeguarded, with a decision on any 2019 share buyback to come when interim results are released in August.