HSBC Holdings plc Interim Results 2022

01 Aug 2022-

Noel Quinn, Group Chief Executive, said:

“Our first-half performance reflects the continued impact of our strategy, with gathering revenue momentum and tight cost control. The progress that we’ve made growing and transforming HSBC means we are in a strong position as we enter the current rates cycle. We are confident of achieving a return on tangible equity of at least 12% from 2023 onwards, which would represent our best returns in a decade.As a result, we are providing more specific dividend payout ratio guidance of around 50% for 2023 and 2024. We understand and appreciate the importance of dividends to all of our shareholders. We will aim to restore the dividend to pre-Covid-19 levels as soon as possible. We also intend to revert to quarterly dividends in 2023.”

Financial performance (1H22 vs 1H21)

• Reported profit after tax increased by $0.8bn to $9.2bn. This included a $1.8bn gain on the recognition of a deferred tax asset from historical losses, as a result of improved profit forecasts for the UK tax group, which has accelerated the expected utilisation of these losses. Reported profit before tax decreased by $1.7bn to $9.2bn, reflecting a net charge for expected credit losses and other credit impairment charges (‘ECL’), compared with a net release in 1H21. Adjusted profit before tax fell by $0.9bn to $10.7bn.
• Reported revenue decreased marginally to $25.2bn, primarily due to foreign currency translation impacts and 1H22 losses on planned business disposals. Adjusted revenue increased by 4% to $25.7bn, driven by higher net interest income, reflecting interest rate rises and balance sheet growth, and strong growth in revenue from Global Foreign Exchange in Global Banking and Markets (‘GBM’). This was partly offset by unfavourable market impacts in insurance manufacturing in Wealth and Personal Banking (‘WPB’).
• Reported ECL were a net charge of $1.1bn, reflecting stage 3 charges of $0.8bn, as well as additional allowances to reflect heightened economic uncertainty and inflation, in part offset by the release of most of our remaining Covid-19 reserves. This compared with a $0.7bn net release in 1H21.
• Reported operating expenses decreased by 4%, primarily due to foreign currency translation impacts. The reduction also reflected the impact of our cost-saving initiatives and a lower performance-related pay accrual, which partly offset increased investment and inflationary impacts. Adjusted operating expenses decreased by 1%.
• Return on average tangible equity (‘RoTE‘) (annualised) of 9.9% increased by 0.5 percentage points compared with 1H21, including a 2.3 percentage point annualised impact of the deferred tax asset gain.
• Common equity tier 1 (‘CET1’) ratio of 13.6% decreased by 2.2 percentage points from 31 December 2021. This reflected a reduction in CET1 capital of $16.8bn, which included a $4.8bn valuation loss in equity from financial instruments as yield curves steepened, and a $13.4bn increase in risk-weighted assets (‘RWAs’) primarily from 1Q22 regulatory changes. The reduction also included the share buy-back of up to $1bn announced at our full-year 2021 results.
• The Board has approved an interim dividend for 1H22 of $0.09 per ordinary share, to be paid in cash.

Financial performance (2Q22 vs 2Q21)

• Reported profit after tax of $5.8bn, including a $1.8bn deferred tax gain. Reported profit before tax was stable at $5.0bn. Net ECL charges compared with 2Q21 net ECL releases, with this impact broadly offset by a reduction in operating expenses and revenue growth. Adjusted profit before tax increased by 13% to $6.0bn.
• Reported revenue increased by 2% to $12.8bn, primarily reflecting interest rate rises, partly offset by an adverse movement in market impacts in insurance manufacturing in WPB, foreign currency translation impacts and losses on planned business disposals. Adjusted revenue increased by 12% to $13.1bn.
• Net interest margin (‘NIM’) of 1.35% rose by 9 basis points (‘bps’) from 1Q22.
• Reported operating expenses were 5% lower, due to foreign currency translation impacts. The impact of our cost-saving initiatives and continued cost discipline mitigated increased investment and inflation. Adjusted operating expenses were stable at $7.5bn.
• The increase in adjusted revenue of 12% while maintaining stable adjusted operating expenses resulted in adjusted jaws of 12%.
• Customer lending was $27bn lower in 2Q22, on a reported basis, due to foreign currency translation impacts. Adjusted customer lending increased by $14bn with growth across all regions.

Outlook for 2022

• The revenue outlook remains positive. Based on the current market consensus for global central bank rates and our continued mid-single-digit percentage lending growth expectations for 2022, we would expect net interest income of at least $31bn for 2022 and at least $37bn for 2023¹ (based on average June rates of foreign exchange).
• We continue to expect our ECL charges to normalise towards 30bps of average loans in 2022, recognising the possible risk of further deterioration in the consensus economic outlook.
• We remain confident in our ability to deliver 2022 adjusted operating expenses in line with 2021, despite inflationary pressures. We now aim to deliver 2023 adjusted cost growth of around 2%, compared with 2022¹, and intend to maintain strict cost discipline thereafter.
• With profit generation and continued RWA actions, we aim to manage back to within our 14% to 14.5% CET1 target range during the first half of 2023. While further share buy-backs remain unlikely in 2022, for future years we expect to return to shareholders excess capital over and above what is required for executing the strategy. The forecast loss on the disposal of our French retail operations is expected to impact our CET1 ratio by approximately 30bps in the second half of 2022.
• The impact of our growth and transformation programmes over the last two years has given us the confidence to update our returns guidance. Subject to the current path implied by the market for global policy rates, we are now targeting a RoTE of at least 12% from 2023 onwards, noting continued macroeconomic uncertainty.
• Given the current returns trajectory, we expect a dividend payout ratio of around 50% for 2023 and 2024. We also intend to revert to paying quarterly dividends in 2023, although we expect the quarterly dividend for the first three quarters to initially be reinstated at a lower level than the historical quarterly dividend of $0.10 per share paid up to the end of 2019.