HSBC expenses the wait before another buyback

HSBC’s “pivot to Asia” underpinned profits in a successful third quarter with little drama, though a second straight quarter of higher than expected costs is a caution.

Growth costs

HSBC’s underlying 9-month profit of $1.2bn, up 8%, reflects the largely progressive trend seen this year. At the same time, expenses were higher: adjustments for the lack of significant items that weighed on prior quarters reveal rising performance related pay and business growth investments totalling $900m. It’s the first sign that whilst HSBC is growing faster in real terms than British rivals, slack in the system is not great. The group has not been, for instance, immune to the slump in trading reported by all global lenders this year. Net trading income declined 5.3% at HSBC’s Global Banking & Markets division. And removing the huge favourable benefit from “significant items” of $3.9bn, an adverse $100m adverse currency effect was enough to pull quarterly profit lower on the year and keep the ratio of income to expenses negative on an underlying basis. To be sure, growth was faster than rising costs in HSBC’s three major businesses. But with efficiency down 273 basis points in the quarter, that too was another sign of a tighter ship at the core than the whole. Whilst increasingly lean after the removal of billions in long-standing costs over the last few years, HSBC still has some fat to trim.

Capital strength

Having outperformed Europe’s banking sector by almost 50% in two years, the group’s London-listed stock now trades at a premium of 5% to book value—the best in town. And with HSBC’s capital creation maintaining a reassuring pace over the last few quarters its key capital ratio has hovered well above medium-term target for most of the year. That means HSBC is still the bank most likely to instigate further schemes to return cash to shareholders. But as the current buyback programme winds down with no replacement announced just yet, HSBC’s more halting share price progress this year—up a modest 13%—speaks volumes.