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Sunnier HSBC leaves something for rainy day

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A pedestrian walks past a panel showing the HSBC lion at its headquarters at the financial Central district in Hong Kong, China August 4, 2020. REUTERS/Tyrone Siu - RC207I96XPCZ

HONG KONG, Aug 3 (Reuters Breakingviews) - How long can “cautious optimism” be used to describe HSBC (HSBA.L), (0005.HK) ? Asking for throngs of shareholders.

The UK-based bank more than doubled first-half profit from a year earlier and talked of good momentum, but conserving capital is also on the agenda. For a deposit-heavy lender in a low interest-rate environment operating through an extended global pandemic, a performance somewhere between solid and good might be all that can be expected. It is also unlikely to jumpstart a valuation of 60% of book value.

HSBC’s pre-tax profit of $10.8 billion came in roughly $1 billion ahead of what analysts were expecting and delivered a 9.4% return on equity. After setting aside $6.9 billion for anticipated bad loans in the first six months of 2020, the bank released $700 million this year, helping offset a 4% drop in revenue. All regions were profitable, including long-time laggard Europe.

Net interest rate margins dipped 22 basis points to a razor-thin 1.21%, but HSBC is hopeful this is the trough. A one percentage point rise would add $7 billion in revenue over two years, the bank estimates.

Paying a dividend again after the Bank of England lifted restrictions is another good sign. Handing back a mere 7 cents a share for now, however, fits the general sense of only slowly moving in the right direction. The figure puts it on track for the lower end of the bank’s 40% to 55% payout ratio. Boss Noel Quinn also will consider buybacks, having ruled them out as recently as February. A common equity tier one ratio of 15.6% suggests, in theory at least, roughly $18 billion of spare funds before it would fall to HSBC’s 13.5% target. Shareholders shouldn’t hold their breath.

HSBC’s 34% total return over the past year reflects the underwhelming mood. It’s only slightly behind Citigroup’s 39% but far below the 70% to 90% generated by UK rivals Barclays (BARC.L) and NatWest (NWG.L), which unveiled more robust payouts last week. For a bank making decent progress on its plans to shrink and restructure, though, HSBC deserves more than “meh”.

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CONTEXT NEWS

- HSBC said on Aug. 2 that first-half pretax profit more than doubled to $10.8 billion from the same period in 2020 when it set aside $6.9 billion to cover anticipated bad loans because of the pandemic. Revenue in the first six months fell 4% on the back of broadly lower interest rates worldwide.

- The bank added that it would pay an interim dividend of 7 cents a share and said it was on track to meet a target annual payout ratio of between 40% and 55% of earnings.

- The Bank of England, HSBC’s primary regulator, on July 31 scrapped its remaining pandemic-related limits on bank payouts. It had previously told banks to drop dividends and share buybacks to help cushion against the economic impact of Covid-19, but it relaxed the rules in December to allow limited returns to shareholders.

- Barclays, Lloyds and NatWest announced more than $3 billion of dividends and buybacks between them along with first-half earnings updates during the week of July 26.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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