HSBC reports 36% drop in Q3 pre-tax profit beating forecasts

Provisions for bad loans dropped to $785m in the three months to September from $3.8bn in the previous quarter

Commuters wearing face masks travel on a tram past HSBC signage displayed outside the bank’s local headquarters in Hong Kong. The bank said its third-quarter pre-tax profits dropped 36%. AFP

HSBC, Europe’s largest bank by assets, posted a 36 per cent drop in its third quarter profit before tax beating analysts' estimates.

Profit before tax dropped to $3.1 billion for the quarter ending September 30, dragged down by lower revenue and provisions for loan losses amid the pandemic-driven economic slowdown, the bank said in a statement.

The quarterly earning was better than the $2.07bn average of analysts’ estimates. HSBC shares gained about 5 per cent in trading at 12:09pm UAE time on Tuesday following the results.

HSBC's third quarter reported profit after tax was down 46 per cent to $2bn, while its adjusted profit before tax dropped 21 per cent to $4.3bn. Quarterly earnings included the lender's share of an impairment of goodwill by its associate Saudi British Bank of $500 million, it said.

Reported revenue for the period slumped 11 per cent to $11.9bn, reflecting the impact of interest rate reductions across all global businesses. It was partly offset by a favourable movement in credit and funding valuation adjustments and higher revenue in global markets business.

Reported expected credit losses and credit impairment charges dropped to $785 million in the third quarter from $3.8bn reported in the previous three months.

“These were promising results against a backdrop of continuing impacts of Covid-19 on the global economy," Noel Quinn, HSBC's group chief executive, said on Tuesday.

"I'm pleased with the significantly lower credit losses in the quarter, and we are moving at pace to adapt our business model to a protracted low interest rate environment."

The bank expects losses from bad loans to be at the lower end of the $8bn to $13bn range, indicated earlier in the year.

"This latest guidance, which continues to be subject to a high degree of uncertainty due to Covid-19 and geopolitical tensions, assumes that the likelihood of further significant deterioration in the current economic outlook is low," HSBC said.

Lenders globally are facing challenging market conditions amid the pandemic, which has tipped the global economy into its deepest recession since the 1930s. Banks have been forced to make provisions for expected loan losses and interest rates globally are at historic lows squeezing profits.

The top lenders in the US and Europe Banks have provisioned $139bn as bad debt losses could exceed $880bn by 2022, according to ComprarAcciones.com data. To offset a drop in revenue and profit margins, banks have resorted to cutting costs and adjusting their business models.

HSBC, which earns the bulk of its revenue from Asian markets, said its operations in the region continued to perform resiliently, with reported profit before tax in the third quarter reaching $3.2bn, despite interest rate headwinds.

"We also intend to increase our rate of investment in Asia, particularly in wealth, the Greater Bay Area, South Asia, trade finance and sustainable finance," Mr Quinn, said.

"I'm pleased with the significantly lower credit losses in the quarter, and we are moving at pace to adapt our business model to a protracted low interest rate environment"

HSBC, which is scaling back operations in Europe and the US, said it plans to continue transformation of the bank.

"We are accelerating the transformation of the group, moving our focus from interest-rate sensitive business lines towards fee-generating businesses, and further reducing our operating costs," Mr Quinn added.

The bank expects to reduce the group-wide 2022 annual cost base beyond its original $31bn target by exceeding the $4.5bn gross cost savings target.

"We expect to incur more than $6bn in ‘cost to achieve’ expenditure to generate these saves," it said.

On Tuesday, HSBC indicated it may resume limited dividend payments this year. Based on the bank's results for this year and its forecasts for the next, the board will consider whether to pay a "conservative dividend for 2020".

"We recognise that dividends are important ... any such dividend would be dependent on the economic outlook in early 2021, and be subject to regulatory consultation," HSBC said. "A final determination is expected to be made and communicated in February 2021 with our 2020 full-year results."

A dividend payout "could entice yield-hungry investors back into the shares," said Jasper Lawler, head of research at London Capital Group.