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HSBC plans bigger Asian investment as it beats earnings estimates

Bank will reinstate dividends and step up fee-generating operations

HSBC Holdings' Hong Kong headquarters. The bank will step up a plan to reverse years of underperformance by investing in higher-return fee-generating operations, especially in Asia.   © Reuters

HONG KONG -- HSBC Holdings reported a better-than-expected fourth-quarter pretax profit on Tuesday and said it plans to put more capital into Asia in a bid to reverse years of underperformance.

The London-headquartered bank also reinstated dividends that it had suspended in 2020 for the first time in 74 years. However, it cut a profitability target, scrapped the practice of paying a quarterly dividend and announced a future payout target well below previous years'.

Amid the hit from the pandemic and brightening prospects of an economic recovery as countries roll out vaccination drives, Chief Executive Noel Quinn is stepping up a plan unveiled a year ago to invest in higher-return, fee-generating operations, especially in Asia.

The push in Asia, which includes further expansion in China, is seen by investors as HSBC choosing sides in the East-versus-West political and economic arena.

The strategy update "is largely in line with expectations and offers limited new surprises, and double-digit [return on tangible equity] will remain challenging in the coming years," said Ronit Ghose, an analyst at Citigroup.

HSBC shares in Hong Kong, which tumbled to a 25-year low in September, on Tuesday briefly touched HK$49.50, their highest level in a year, but gave back almost all gains to close at HK$46.70, or 0.4% higher, as investors took the dividend guidance as conservative and the strategy update as expected.

HSBC, which was founded in 1865 as the Hongkong and Shanghai Banking Corp., has deftly avoided political entanglements for much of its history. The bank's support last year for a national security law that Beijing imposed on Hong Kong, though, elicited criticism in the U.S. and U.K.

London-based HSBC said it will focus on China, Hong Kong, Southeast Asia and India for growth. It also said that it is exploring "strategic options" for its U.S. retail network.   © Reuters

"HSBC wants to focus on areas such as wealth management, where the competition is already high," said Andrew Sullivan, a director at Hong Kong-based brokerage firm Pearl Bridge Partners. "The plans unveiled don't showcase a radical overhaul as promised in previous years, but it will still be challenging for HSBC to pull off the changes in an increasingly competitive market and with the additional political backdrop between China and the West."

On Tuesday, the bank said it plans to increase capital allocation to Asia to 50% from 42% in the medium term, raise the contribution from fee-generating businesses to 35% from 29%, and lift its total revenue growth rate to mid-single digits from low-single digits now. The lender said it plans to invest $6 billion additionally in wealth management, including for possible acquisitions, and international wholesale banking to drive "double-digit" growth in the region.

The bank said it would focus on China, Hong Kong, Southeast Asia and India for growth. It also said that it is exploring "strategic options" for its U.S. retail network, although it would continue to focus on its wealth-management platforms in the world's largest economy. A sale of its money-losing 150-branch U.S. business would end a 40-year attempt to run a full-service bank in America.

HSBC also said it is negotiating a sale of its French branch network and expects to book a loss if the business is sold.

The bank said it will slash costs by as much as $5.5 billion by 2022 compared with the previous target of $4.5 billion. It also will continue to aim for a reduction in gross risk-weighted assets of over $100 billion during the period.

It cut 11,000 positions last year and will continue to ax jobs in its back office, technology, operations and finance departments as it increases spending on digital, it said.

However, it no longer expects to reach its targeted return on average tangible equity, a key measure of how efficiently it invests shareholder funds, of between 10% and 12% by 2022. It blamed the pandemic and low interest rates in its key markets.

"If interest rates were 100 basis points higher across the board it would improve returns by three percentage points," Chief Financial Officer Ewen Stevenson said in an investors' call.

Adjusted pretax profit for the three months ending Dec. 31 stood at $2.2 billion, down 50% from the same period a year earlier but besting analysts' consensus expectations of $1.8 billion, as compiled by HSBC. Full-year adjusted pretax profit fell 45% to $12.1 billion as provisions for loan losses in the wake of the coronavirus pandemic soared.

The bank's reported net profit attributable to ordinary shareholders in the quarter ending Dec. 31 stood at $562 million compared with a loss of $5.51 billion a year earlier, when it absorbed one-off costs. Net profit for the full-year fell 35% to $3.9 billion.

Loan-loss provisions stood at $8.8 billion in 2020, at the low end of a previously announced range of $8 billion to $13 billion. The bank expects provisions in 2021 to be "materially lower" as economies recover and fall back to trend next year.

The bank will "aim to establish HSBC as a dynamic, efficient and agile global bank with a digital-first mindset," Quinn said in a statement. "We have had a good start to 2021, and we are cautiously optimistic for the year ahead."

Quinn hopes to have greater success than his predecessors at winning over investors and boosting returns.

John Flint, his immediate predecessor, lasted less than 18 months in the top role as the bank's board became frustrated at the slow pace of change then, according to people familiar with the matter. Quinn became interim CEO in August 2019 and was confirmed permanently in that position in March 2020.

The first attempt to remodel the bank began more than 10 years ago and accelerated soon after a money-laundering scandal that resulted in fines of $1.9 billion. The bank later exited a number of businesses and cut tens of thousands of jobs.

A second overhaul was unveiled in 2015. It, too, was a pivot to Asia, with the aim of reducing assets allocated to less profitable markets, such as Europe and the U.S., and use the freed-up capital to bulk up in fast-growing Asian economies.

The bank's board announced an interim dividend for 2020 of 15 cents per ordinary share. The board expects a target payout ratio of between 40% and 55% of reported earnings from 2022 onward.

The measure was last at that level in 2013 and high payouts were the lure for Hong Kong investors, who own a third of the bank, to hold the company's shares.

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