October 29, 2018 / 4:41 AM / 21 days ago

Cost control helps HSBC to spring surprise with strong profit growth

HONG KONG/LONDON (Reuters) - HSBC Holdings Plc (HSBA.L) posted a higher-than-expected 28 percent rise in quarterly profit on Monday, showing progress in its battle to control costs and shaking off fears that rising global political tensions could hurt its business.

Europe’s biggest bank by assets has reaped the benefits of a thorough restructuring after the global financial crisis, but investors have lately worried about rising costs as new CEO John Flint steps up investments.

The profit growth cheered investors in the London-headquartered lender and boosted the wider European bank sector, starved of good news in 2018 amid fears about bad loans, Brexit, and weak revenues.

HSBC’s shares rose as much as 5 percent in London on Monday morning and were up 4.2 percent by 0820 GMT. That left Britain’s FTSE 350 banks index .FTNMX8350 up 2.8 percent and on track for its best daily performance since January.

HSBC veteran Flint, who began in the role in February, has outlined plans to spend as much as $17 billion in three years on technology and in China, including hiring more people to boost growth in investment banking and private banking where it has lagged rivals.

HSBC makes more than three quarters of its profits in Asia, especially from its highly profitable Hong Kong retail banking operation.

“POSITIVE JAWS”

Analysts have said HSBC’s share price will be capped until it can show revenues rising above costs, in a trend known as ‘positive jaws’ in industry parlance.

While HSBC reported the metric in negative territory for the third quarter, Flint said the bank is on track for it to swing to positive by the end of the year.

“We’re absolutely in line with our plans, so we still expect to get positive jaws for the full year,” Flint told Reuters in a phone interview. “The real driver is that we have got control over cost base and we got some revenue momentum.”

The cost reduction came as HSBC nears the end of a decade of expensive restructuring following the 2008 crisis.

In the three months ended Sept.30, the bank reported pretax profit of $5.9 billion, up from $4.6 billion in the same period a year earlier.

HSBC said its expenses in the third quarter fell 2.4 percent from the preceding three months, reversing the trend of the last couple of quarters. Quarterly reported revenue grew 6.3 percent from the year-ago period to $13.8 billion.

The bank’s number of full-time employees as of the end of September showed an increase of 5,044 from December to 233,731, it said, reversing the trend of shrinking headcount in recent years as the bank slashed jobs following the 2008 crisis.

FILE PHOTO: A logo is pictured on HSBC bank in Geneva, Switzerland, August 16, 2018. REUTERS/Denis Balibouse/File Photo GLOBAL BUSINESS WEEK AHEAD

HSBC has hired senior investment bankers from JPMorgan and Goldman Sachs in recent months after losing a number of high-profile dealmakers this year.

TRADE TENSIONS

Despite cuts to its network in recent years, HSBC’s global reach sees it exposed to a range of geopolitical risks worldwide as trade tensions mount.

Flint said he had not yet seen any signs of distress among corporate and individual customers’ financial health as Britain approaches the crunch period in its exit talks with the European Union, amid rising concerns of a no-deal Brexit.

“We are hoping that progress can be made in the coming weeks,” he said.

Flint in an interview with Reuters played down the likely impact on foreign trade and investment in Saudi Arabia following the killing of journalist Jamal Khashoggi.

The CEO was also calm about the near-term impact of the escalating Sino-U.S. trade tensions on corporate activity. “It’s a real issue to be clear, but it’s not yet manifesting itself in business activities in a meaningful way,” he said.

Flint did sound a note of caution in the bank’s second home market and key profit engine of Hong Kong, however, saying rates of loan growth will moderate a little in the coming months as interest rates rise and the economy slows.

Reported pretax profit of HSBC’s Asia operations, which accounted for 75 percent of the bank’s overall profits in the September quarter, rose 10.7 percent during the third quarter to $4.5 billion.

HSBC is set to be the first company to issue Chinese Depositary Receipts (CDR), through a link between the London and Shanghai stock exchanges which will begin by year end, people familiar with the matter said earlier this month.

Flint said the bank was looking at the CDR option, but declined to comment further.

Editing by Muralikumar Anantharaman/Keith Weir

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