HSBC is handing $2.7bn (£2bn) back to shareholders after quarterly profits jumped 32%, a result that lands in the middle of a widening debate over whether Britain’s largest banks can absorb a fresh tax raid in tomorrow’s budget.
The London-headquartered bank reported profits of $9.6bn for the July to September quarter. That grew by nearly a third but fell slightly below consensus estimates. The payout includes another $1bn share buyback plus an interim dividend of $0.1 per share, which the bank said would mean distributing a further $1.71bn.
For chancellor John Healey, putting the finishing touches to a budget due in roughly 28 hours, the numbers will further assure the Treasury that the UK’s top banks can shoulder a tax hike. HSBC’s results follow Barclays, which last week reported a 12% jump in profits, and the Guardian has reported that Healey has already decided to tap the financial sector for additional revenue.
The market was not inspired. HSBC shares fell 6.7% in early trading, dropping first in Hong Kong and then in London, and appeared to pull the rest of the banking sector down with them. Chief financial officer Pam Kaur, asked by reporters about the decline, suggested investors had wanted more.
“I think in a high interest rate environment, there’s sometimes a market expectation that we upgrade guidances or we change our targets, and particularly from a banking NII perspective. So that’s all I can think of,” she said.
Will Howlett, financials analyst at Quilter Cheviot, framed the sell-off as elevated expectations rather than deteriorating fundamentals. “HSBC’s third-quarter results have fallen a little short of market expectations. Revenue was weaker than anticipated, with pressure on net interest income and a slowdown in wealth, and that disappointment has translated into a slide in the share price,” he said. “The numbers themselves are not disastrous. Profitability remains strong, with an 18.2% return on tangible equity, while loan losses were better than expected and HSBC has reiterated its target of delivering returns above 17% over the next three years.”
He added that after a strong run for the shares, investors have grown accustomed to robust results, so even relatively modest misses can prompt a sharper reaction. “Today’s fall therefore looks more like disappointment against high expectations than a significant deterioration in the underlying business.”
Chris Beauchamp, chief market analyst at IG, offered a similar read. “You don’t usually get fireworks from HSBC results, and these are no exception. There are signs of some improvement overall, and a boost to the buyback is welcome, but it’s clear why the market wasn’t really inspired by these numbers,” he said, noting the results provide “some useful air cover ahead of a UK budget that will may include another raid on banks.”
The mechanics of the profit jump matter for the tax debate. Net interest income, the gap between what banks charge borrowers and pay savers, rose 6%, or $500m, to $9.3bn from $8.8bn year on year, lifted by deposit growth in Hong Kong and the benefit of reinvesting the bank’s structural hedge at higher yields, while UK deposits stayed flat. The larger drivers were cost-cutting and legal matters. Operating expenses fell 12%, or $1.3bn, to $8.8bn, and legal provisions dropped by $1.4bn, the sum set aside last year to cover a claim related to Bernie Madoff’s Ponzi scheme.
Campaigners argue the sector’s windfall justifies heavier taxation. The TUC is urging the chancellor to go beyond reversing Jeremy Hunt’s cut to the bank surcharge from 8% to 3%, arguing that hiking the surcharge to 16% would deliver £24bn over four years, while a 35% surcharge, matching the Conservatives’ energy windfall tax, would yield £60bn. General secretary Paul Nowak said the results make it “blatantly obvious banks can afford to contribute more,” noting Britain’s big four banks have made more than £200bn in profit over the last five years.
The New Economics Foundation’s Abhijay Sood went further, arguing that restoring the surcharge to 8% would raise just £1.8bn a year and that the chancellor should instead claw back what he called a “stealth subsidy” from taxpayers via the Bank of England’s quantitative easing programme.
Kaur, for her part, signalled support for the government’s direction. “We are very encouraged by the government’s growth agenda,” she said, while adding that HSBC would have to respond to customer behaviour as businesses make their investment decisions. “When the lending demand goes up, we lend more. We are ready with the right risk appetite to do so. We’ll just have to see how businesses and customers react.”