LONDON/HONG KONG (Reuters) - HSBC HSBA.L0005.HK stuck to its promise of higher dividends on Tuesday after a 14 percent profit drop fuelled doubts among some investors about the bank's ability to increase payouts.
Europe’s biggest bank also failed to boost its key capital ratio, underlining the challenge it faces in building capital buffers while growing its market leading 8 percent dividend yield.
The bank's dividend policy contrasts with European rivals including Barclays BARC.L, Standard Chartered STAN.L and Deutsche Bank AG DBKGn.DE, all of which have scrapped or reduced payouts as they grapple with restructuring costs.
“I don’t think those share prices have performed well as a result of cancelling dividends...it’s not something our shareholders would thank us for,” Chief Executive Stuart Gulliver said on a conference call.
HSBC’s dividend payout is already the highest among major European banks, according to Thomson Reuters data.
Bernstein analyst Chirantan Barua said in a note that a progressive dividend policy was “untenable” given the tough earnings environment and the fact that HSBC had not yet reached its regulatory capital threshold.
However, Gulliver said the $5.2 billion sale of HSBC’s Brazil business to Banco Bradesco SA should be completed by June 30, and would take its key capital ratio to around 12.5 percent. HSBC reported this was unchanged at 11.9 percent, from the end of last year, against analyst forecasts of 12.1 percent,
Finance Director Iain Mackay added that it would take a sharp decline in revenues if the global economy moved into recession, or regulatory demands for higher capital levels, to see HSBC reverse its stance on the dividend.
HSBC booked a pretax profit of $6.1 billion for the first three months of 2016, down from $7.1 billion a year ago, but above an average forecast of $4.3 billion from analysts polled by the bank itself.
This reflected a tighter grip on expenses than analysts had forecast and a resilient performance from the bank’s trading business during rocky global markets earlier in the year.
“It (the dividend) can be maintained. I forecast a flat 51 cents dividend this year although I don’t expect that to be covered by earnings,” Investec analyst Ian Gordon told Reuters.
Besides worries about the dividend, investors also suffered a drop in earnings per share to $0.20 compared with $0.26 for the equivalent period in 2015.
That fall is expected to reignite speculation about a share buyback in the near future, after Gulliver said the bank was considering purchases to shore up HSBC’s wilting shares, which are down by 28 percent in the last 12 months.
HSBC’s shares gave up early gains of as much as 2.5 percent and were trading 1.36 percent lower by 1207 GMT.
Investors remain concerned over whether HSBC can improve revenues without exceeding its cost of capital by expanding in China at a time of slowing economic growth there.
Gulliver said a 22 percent drop from revenues associated with the internationalisation of the yuan in the first quarter was the result of declining customer interest in forex options, but other China initiatives should pick up the slack.
Writing by Sinead Cruise; Editing by Mark Potter and Alexander Smith
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