HSBC would be unwise to fall back on the Fed

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MELBOURNE, Feb 22 (Reuters Breakingviews) - Noel Quinn anticipates that central bankers will lend a hand, but he could do with extra self-help, too. The chief executive of HSBC (HSBA.L), (0005.HK), which on Tuesday reported that net income more than doubled last year to $12.6 billion, reckons his mega-bank will hit its 10% return on tangible equity target a year early, in 2023, if interest rates rise as markets forecast. It’s an opportunity to put greater focus on costs.

HSBC is more geared to tighter monetary policy than some peers. Interest income accounted for 53% of revenue last year, 10 percentage points higher than at JPMorgan (JPM.N), for example. Since much of HSBC’s trade and lending books are short-dated, the benefit should flow through quickly. The bank models a hypothetical $5.4 billion revenue boost in 12 months if all relevant interest rates rise 1 percentage point.

That kind of uplift is unlikely, but on its own would offset costs that ate up 70% of 2021 revenue, or 64% after adjustments. Quinn has managed to keep expenses largely flat and expects them to stay roughly the same for the next year or two. Fold in the extra interest income, and all else being equal, adjusted costs fall below 58%, in the same ballpark as JPMorgan and others.

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Rate increases bring their own risks, however. Trading desks and bank treasury departments can fall on the wrong side of even well-flagged monetary tightening. The battle for deposits and loans tends to intensify. Higher rates also will inevitably deter some borrowers. At least HSBC’s Hong Kong mortgage book provides some insulation with a low loan-to-value ratio below 50%.

Growing political tensions, not least around Ukraine, add concern. And Hong Kong, where HSBC’s fortunes are closely linked, presents its own problems. Fresh efforts to battle the Omicron variant will take their toll after two years of restrictions. China’s economic slump is also a worry.

Much of any benefit from higher interest rates already seems priced in, with HSBC trading at about 80% of expected book value. That correlates quite well with the bank’s 10% return on tangible common equity target, assuming a 10% cost of capital. If Quinn wants to give investors more to cheer about, slashing costs rather than just stabilising them would be a good place to start.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


- HSBC said on Feb. 22 that if central banks lift interest rates as market prices are implying, the resulting improvement in its lending margins would help it hit a 10% return on its tangible equity target in 2023, a year earlier than expected. The profitability figure for 2021 was 8.3%, up from 3.1% in 2020.

- The bank reported that its fourth-quarter pretax profit more than doubled, to $2.7 billion, from the same period a year earlier, thanks to lower credit impairment charges and operating expenses.

- “We carry good business momentum into 2022 in most areas and expect mid-single-digit lending growth over the year,” the bank said in a statement, adding that it expects a weaker performance in Asian wealth management in the first quarter of 2022.

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Editing by Jeffrey Goldfarb and Thomas Shum

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