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HSBC Q3 Pre-Tax Earnings Decline Y/Y Despite Revenue Growth

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HSBC Holdings (HSBC - Free Report) reported a third-quarter 2022 pre-tax profit of $3.1 billion, down 41.8% from the prior-year quarter.

Results reflected a rise in adjusted revenues. However, adjusted expenses increased from the year-ago quarter, which was a headwind. The expected credit losses and other credit impairment charges (ECL) were a net charge in the quarter under review against a release in the prior-year quarter.

Adjusted Revenues & Expenses Increase

Adjusted total revenues of $14.3 billion increased 27.7% year over year. Reported revenues were down 3.3% year over year to $11.6 billion.

Adjusted operating expenses rose 5% year over year to $7.3 billion.

In the quarter under review, reported ECL was a charge of $1.1 billion, including allowances to reflect increased economic uncertainty, inflation, rising interest rates and the ongoing developments in mainland China’s commercial real estate sector. This compared with a net release of $0.7 billion in the prior-year quarter.

Common equity Tier 1 (CET1) ratio as of Sep 30, 2022, was 13.4%, down from 15.8% recorded as of Dec 31, 2021. Leverage ratio was 5.4%, up from 5.2% at the end of December 2021.

Quarterly Performance by Business Lines

Wealth and Personal Banking: The segment reported $111 million in pre-tax profit, down 94% from the year-ago period. The decline was due to a fall in revenues.

Commercial Banking: The segment reported a pre-tax profit of $2 billion, up 3.1% from the prior-year quarter. Higher revenues supported the rise.

Global Banking and Markets: Pre-tax profit was $1.5 billion, up 19% from the prior-year quarter-end. The rise was primarily aided by higher revenues.

Corporate Centre: The segment reported a pre-tax loss of $483 million against a pre-tax profit of $323 million in the year-ago quarter.

Outlook

Based on the current market consensus for global central bank rates, the company expects a net interest income of $32 billion for 2022. It expects a net interest income of at least $36 billion for 2023.

Loan growth is expected in the low-single-digit percentage rate.

Adjusted operating expenses for 2022 are projected to be unchanged from that reported in 2021 despite inflationary pressures. For 2023, year-over-year adjusted cost growth of 2% is expected. HSBC intends to maintain strict cost discipline thereafter.

Given the current consensus economics and default experience, the company expects ECL charges to normalize toward 30 bps of average loans in 2022. For 2023, ECL charges are expected at the higher end of the company’s planning range of 30-40 bps.

Management expects a return on tangible equity of 12% or more from 2023 onward.

The CET1 ratio is expected to be between 14% and 14.5% in the first half of 2023.

Management expects mid-single-digit growth in risk-weighted assets (RWAs) in 2022 through a combination of business growth, acquisitions and regulatory changes, partly offset by additional RWA savings. RWA savings are projected to be more than $120 billion by the end of 2022.

HSBC expects a dividend payout ratio of 50% for 2023 and 2024.

Our View

HSBC’s strong capital position, initiatives to strengthen digital capabilities, extensive network and efforts to improve operating efficiency through business-restructuring plans are expected to support financials. Exiting from the U.S. and French retail banking operations will help HSBC focus on Asia.

HSBC Holdings plc Price, Consensus and EPS Surprise

 

HSBC Holdings plc Price, Consensus and EPS Surprise

HSBC Holdings plc price-consensus-eps-surprise-chart | HSBC Holdings plc Quote

Currently, HSBC sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Performance of Major U.S. Banks

Higher loan balance, rising rates and solid markets performance drive JPMorgan’s (JPM - Free Report) third-quarter 2022 earnings of $3.12 per share, which surpassed the Zacks Consensus Estimate of $2.97. The results included $959 million or 24 cents per share of net investment securities losses in the Corporate segment. Our estimate for earnings was $2.98 per share.

A disappointing investment banking performance, a bigger reserve build and an increase in operating expenses hampered JPM’s quarterly performance to some extent.

Wells Fargo’s (WFC - Free Report) third-quarter 2022 adjusted earnings per share of $1.30 outpaced the Zacks Consensus Estimate of $1.09. Results excluded $2 billion or 45 cents per share of charges related to a number of “historical matters, including litigation, customer remediation, and regulatory matters.”

Results benefited from higher NII, rising rates and solid average loan growth. Yet, dismal non-interest income, higher provisions and weakness in the mortgage business were the major undermining factors for WFC. Also, the rise in non-interest expenses acted as a headwind.


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