HSBC resumes dividend, increases Asia investment by US$6 billion as last year’s profit decline beats market forecasts

Chad Bray
·5-min read

HSBC, the biggest of Hong Kong’s three currency-issuing banks, said it would resume paying dividends to shareholders after a fourth-quarter net profit helped it report a smaller-than-forecast decline in 2020 earnings.

The London-based bank, which generates much of its revenue in Asia, also said it would invest US$6 billion in its wealth management and wholesale banking operations in Asia over the next five years as it places greater emphasis on the region. That would include increasing its wealth sales force in Hong Kong, Singapore and other parts of Southeast Asia.

HSBC cancelled its final 2019 payment and suspended an interim payout last year at the request of its chief regulator in the United Kingdom, raising the ire of retail investors, many of whom are in Hong Kong.

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The bank, Europe’s largest by assets, said it expects to reduce its annual cost base by a further US$1 billion to US$30 billion in the medium term. The lender announced last year plans to cut annual costs by US$4.5 billion and slash 35,000 jobs by 2022.

“I believe we have a very successful platform already in existence in Asia, particularly in Hong Kong. A lot of that wealth comes from the business customers that we already bank and we have a proven track record of converting that business from wholesale banking to wealth,” HSBC CEO Noel Quinn said on a conference call with journalists. “We’re investing on a strong platform and that’s why I’m confident we can succeed.”

The bank earned a net profit of US$562 million in the fourth quarter, improving from the previous year’s US$5.5 billion loss that had included a goodwill impairment of US$7.3 billion associated with its investment bank and commercial unit in Europe and US$400 million in restructuring charges.

For the full year, HSBC reported a pre-tax profit of US$8.8 billion, beating the consensus estimate of US$8.3 billion by analysts polled by the bank. That was a 33.8 per cent decline from the pre-tax profit of US$13.3 billion a year earlier. The bank’s net profit fell to US$3.89 billion, from US$5.97 billion a year ago.

Provisions for potential soured loans, known as expected credit losses, reached US$8.8 billion in 2020, the low end of HSBC’s projected range for the year.

HSBC’s head office in Central, Hong Kong on September 21, 2020. Photo: Sam Tsang
HSBC’s head office in Central, Hong Kong on September 21, 2020. Photo: Sam Tsang

HSBC is the first of Hong Kong’s biggest lenders to report its 2020 results, with Standard Chartered set to issue its results on Thursday while Bank of China (Hong Kong) is expected to report its results on March 30. Bank of East Asia is expected to update investors on its results on Wednesday.

On Tuesday, HSBC said it would make a full-year dividend payout of 15 US cents a share for 2020 and would target a payout ratio of 40 per cent and 55 per cent of reported earnings for 2022 onwards. The dividend will be payable on April 29.

The bank said it would not pay quarterly dividends in 2021, but would evaluate whether to pay an interim dividend when it reports half year results in August.

The lender paid out 30 US cents a share in interim dividends in 2019 before cancelling its final expected dividend of 21 US cents a share in April 2020 after a request by the Prudential Regulation Authority (PRA), an arm of the Bank of England.

The suspension of dividend payments sparked a revolt among shareholders in Hong Kong, where many older investors have relied on regular dividend payments to supplement their retirement income.

HSBC’s shares fell to their lowest level in 25 years in September amid concerns about Sino-US tensions, a challenging operating environment and investor furore over the slashed dividends. The PRA said in December it was comfortable with UK-based lenders restarting investor payouts.

The bank’s shares have since recovered those losses and jumped more than 7 per cent last week on investor anticipation of the dividend restart and growing optimism about the pace of the economic recovery from the coronavirus pandemic.

Shares of HSBC rose 0.4 per cent to close at HK$46.70 in Hong Kong on Tuesday.

Citing historically low interest rates and a challenging operating environment, HSBC also lowered its profitability target for return on average tangible equity to 10 per cent over the medium term.

Meanwhile, profit at HSBC’s Hang Seng Bank unit fell 33 per cent to HK$16.7 billion (US$2.2 billion) in 2020, compared with HK$24.8 billion a year earlier. HSBC owns 62.1 per cent of Hang Seng Bank.

Hang Seng attributed the decline to lower transaction volumes by commercial and retail customers as the coronavirus pandemic weighed on investments and spending activity in Hong Kong.

Founded in Hong Kong and Shanghai in 1865, Asia has always played a major role in HSBC’s business, but the bank is placing a greater emphasis on the region under Quinn, who was named the bank’s CEO in March, seven months after serving in the role on an interim basis.

HSBC CEO Noel Quinn. Photo: AFP
HSBC CEO Noel Quinn. Photo: AFP

In addition to shifting more capital to Asia, HSBC said it was exploring “organic and inorganic options” for its US retail bank and was in negotiations regarding a potential sale of its French business.

Bloomberg reported on Sunday that HSBC was considering moving three top executives in global banking and markets, wealth and personal banking and commercial banking businesses to the region as it shifts more capital to Asia as part of its ongoing restructuring. Those three business lines accounted for 95 per cent of its 2019 revenue.

“We are giving consideration to some of the heads of our global businesses being located in Hong Kong,” Quinn said on Tuesday. “We think it would be good to have them closer to where the opportunity for growth is and to serve our clients in Asia directly. That’s something I benefited from myself when I was in Hong Kong living there.”

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