HSBC Holdings PLC promised a $1 billion share buyback program starting next month after unveiling sharply lower first-quarter profits hit by credit loss provisions relating to China and Russia.
The bank announced a profit before tax of $4.2 billion, down $1.6 billion on the same quarter last year, with higher expected credit losses and lower non-interest income more than offsetting the positive impact of higher interest rates.
The U.K.-based, Asia-focused bank said it will launch a $1 billion share buyback program in May, following the completion of the $2 billion buyback program announced in October 2021. However, group CFO Ewen Stevenson played down the prospect of further buybacks in 2022.
"We think it is now unlikely that we will do further buybacks in the second half of this year. But the reverse of that should be much higher net interest income, much higher returns, much higher distribution capacity in 2023 and beyond," Stevenson told analysts on an investor call.
HSBC's common equity Tier 1 ratio decreased to 14.1% at March-end from 15.8% at Dec. 31, 2021, and the lender expects to book in the second half an impact of about 35 basis points from the sale of its French retail business. The sale is expected to contribute to the bank's CET1 ratio falling below its target range of 14% to 14.5% in the coming quarters, according to Stevenson.
The bank still expects to deliver mid-single-digit percentage growth in revenue for 2022, despite the 4% year-over-year drop in the first quarter.
Shares of HSBC fell 3.8% in morning trading in London.
Expected credit losses rise
HSBC announced expected credit losses of $642 million in the first quarter of 2022 compared with a release of $420 million in the same quarter last year.
China's economic woes led to the bank booking $160 million of expected credit losses related to the country's commercial real estate sector. HSBC's long-term strategy is to focus its resources on Asia, with a goal of redeploying $100 billion of capital to the continent while it cuts $4.5 billion in costs along with 35,000 jobs in Europe and the U.S.
China's commercial real estate sector is still in flux, though the liquidity squeeze seen at the end of last year is beginning to ease, Stevenson said.
"The underlying credit conditions of the China commercial real estate markets continue to be weak. We did see a number of small names go into defaults this quarter," the CFO said.
Despite being the biggest foreign bank in China, HSBC has less than 0.2% market share, Stevenson said. It nevertheless managed to increase the loan book by 11% last year. Stevenson said the bank was less affected by China's macro-economic situation because of its relatively small market share, noting that its Pinnacle life insurance business had continued to grow well, for instance. "We are somewhat insulated," the CFO said.
In Hong Kong, where HSBC is the biggest lender, the bank is much more affected by macro-economic factors, said Stevenson. He expects a strong recovery in the bank's Hong Kong earnings as COVID-19 restrictions are lifted and branches reopen following the recent lockdown. Interest rates are also likely to increase.
"The impact on Hong Kong is a far more important driver of what happens to us," Stevenson said.
HSBC also booked a $250 million charge related to Russia after its invasion of Ukraine. The bank has been criticized for its continued presence in Russia, but CEO Noel Quinn said HSBC Russia is not accepting new businesses or customers.
"The vast majority of our business in Russia serves multinational corporate clients headquartered in other countries, and as a global bank, HSBC has a responsibility to help them manage these challenging circumstances," Quinn said in a statement.
The group's exposures booked in Russia through its local subsidiary stood at $1.3 billion at the end of March, while the unit's total liabilities and equity amounted to $1.53 billion.
"We think that $250 million charge we've taken for Russia is a good estimate of what we can see today," Stevenson said, noting that "something dramatic" would have to change in relation to the war or the group's position on its Russian subsidiary to get to different outcomes of what the lender has announced.