HSBC’s fourth-quarter pre-tax profit jumps on higher revenue and lower costs

HSBC Holdings HSBC reported pre-tax profit of $2.7 billion in the fourth quarter of 2021, up 92.3% from $1.4 billion in the year-ago quarter.

Results for the reported quarter benefited from higher adjusted revenues and lower expenses. A decline in the adjusted change in expected credit losses (ECL) and other credit impairment charges was another positive factor.

For 2021, pretax profit was $18.9 billion, up significantly from the $8.8 billion recorded the previous year.

Increase in adjusted revenues, decrease in expenses

Adjusted total quarterly revenue of $12.1 billion was up 2.5% year over year. Reported revenue rose nearly 2% to $12 billion.

Adjusted operating expenses fell 8.3% year over year to $8.3 billion. A lower bank drawdown of $0.6 billion and good expense control efforts resulted in lower total costs.

The adjusted change in ECL and other credit impairment charges was $450 million, down from $1.2 billion in the prior year quarter.

The Common Equity Tier 1 (CET1) ratio as of December 31, 2021 was 15.8%, compared to 15.9% recorded as of December 31, 2020. The leverage ratio was 5.2%, compared to 5.5% at the end of December 2020 .

Quarterly performance by business line

Wealth management and personal banking: The segment reported a pre-tax profit of $623 million, down 38.2% from the same period a year earlier. This decline is explained by lower revenues and higher costs.

The Commercial Bank: The segment recorded a pre-tax profit of $1.4 billion, up significantly from the $355 million recorded in the year-ago quarter. Higher revenues and lower expenses drove the increase.

Global Banking and Markets: Pretax profit was $387 million, down 45% from the end of the year-ago quarter. The increase in expenses was partly offset by an increase in income.

Corporate Center: The segment recorded a pretax profit of $293 million compared to a pretax loss of $682 million in the prior year quarter.

Share buyback update

HSBC intends to launch a $1 billion share buyback plan once the existing buyback authorization of up to $2 billion has been completed.

Outlook

The company’s net interest income outlook is “significantly more positive”. Management expects mid-single-digit loan growth in 2022. However, weaker performance from wealth management in Asia is expected in the first quarter of the year.

Adjusted operating expenses for the full year 2022 are expected to be in line with those reported in 2021 despite inflationary pressures. The cost to achieve expenditures of $3.4 billion is expected to generate more than $2 billion in cost savings over the course of the year.

In 2023, the company expects to manage adjusted operating expense growth of 0-2% compared to 2022. Measures taken in 2022 to help offset inflation will likely result in cost savings of $0.5 billion. dollars in 2023.

Given the current economic consensus and default experience, the company expects ECL charges to normalize toward 30 basis points of average loans in 2022, provided it retains 0.6 billion dollars in Covid-related allocations by the end of 2021.

If policy rates follow the current implied market consensus, management expects to achieve a return on tangible equity of 10% or more for 2023, a year ahead of previous forecasts.

The company expects to meet its target payout ratio of 40-55% of reported earnings per share in 2022.

The CET1 ratio is expected to be between 14% and 14.5% by the end of 2022.

Management expects mid-single-digit growth in risk-weighted assets (RWA) in 2022 through a combination of business growth, acquisitions and regulatory changes, partially offset by additional RWA savings. RWA savings are expected to reach over $120 billion by the end of 2022.

Our point of view

The low interest rate environment across the world is expected to continue to hurt HSBC’s revenue growth to some extent. However, the company’s strong capital position, initiatives to build digital capabilities, extensive network and efforts to improve operational efficiencies through business restructuring plans should support financials. Exiting retail banking activities in the United States and France will help HSBC to focus on Asia.

At the same time, the acquisition of AXA Singapore’s insurance assets is likely to help HSBC expand its business in the region.

HSBC Holdings plc price, consensus and EPS surprise

HSBC Holdings plc price-consensus-eps-surprise-chart | Listing of HSBC Holdings plc

Currently, HSBC carries a Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of other foreign banks

Mitsubishi UFJ Financial MUFG reported profit attributable to owners of the parent company for the third quarter of fiscal 2021 (ended Dec. 31) of 1.07 billion yen ($9.42 billion), up 76.3% from one year to the next.

Higher gross profits, higher trust fees, as well as net fees and commissions and lower credit costs, drove MUFG higher. Higher general and administrative expenses and lower loan and deposit balances acted as headwinds.

Notably, for fiscal year 2021 (ending March 31, 2022), Mitsubishi expects consolidated profits attributable to owners of the parent company of 1.05 trillion yen.

UBS Group AG UBS reported net profit attributable to shareholders of $1.3 billion in the fourth quarter of 2021, down 18% from the year-ago quarter level.

UBS’s performance was affected by rising expenses. Nevertheless, a 9% year-over-year increase in net fee and commission income, as well as a 9% increase in net interest income, played a favorable role. Additionally, the release of net credit losses was supportive.

UBS’s $1.4 billion deal to acquire Wealthfront is expected to accelerate its growth in the United States by strengthening its reach to high net worth investors and bolstering its distribution skills.

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