By Christopher Thompson
LONDON (Reuters Breakingviews) - Prospective buyers of HSBC shares might question the upside for a bank that already trades at a chunky 1.3 times its tangible book value, a premium to European peers. Third-quarter results provided a rough guide for potential bulls. The message to incoming Chief Executive John Flint is clear: more of the same, please.
True, HSBC’s adjusted pre-tax profit for the quarter was 1 percent lower than in the same period last year as costs grew faster than income. More significant, however, is the 6 percent year-on-year jump in pre-tax profit from Asia, the region that accounts for around 70 percent of HSBC’s earnings. Robust economic growth there meant lending in the third quarter was 17 percent higher than a year ago.
HSBC’s undiminished ability to attract deposits – savers’ balances have increased by 5 percent this year – means it has plenty of spare ammunition for lending. The bank’s loan to deposit ratio remains a relatively conservative 70 percent. Though it’s strange to hear an institution founded in Hong Kong and Shanghai 152 years ago talk of a “pivot to Asia”, the region continues to offer promise.
HSBC’s large pool of dollar-denominated and sterling accounts is turning from a drag to a source of strength. The bank reckons each 25 basis-point rise in dollar interest rates in the United States and Hong Kong roughly yields an additional $330 million in net interest income. A similar uptick in UK borrowing costs would add an extra $106 million. As the U.S. Federal Reserve tightens, and the Bank of England prepares to do so, HSBC’s lowly net interest margin of 1.63 percent should expand and revenues increase. That in turn will help boost the bank’s return on tangible equity which, at 9.3 percent for the first nine months of 2017, is already close to its 10 percent target.
Flint, who formally takes charge in February, has scope to make further improvements. A strategic review might question the utility of having a Mexican bank. HSBC’s 19 percent stake in China’s Bank of Communications looks increasingly hard to justify. Yet these problems are minor when compared to the challenges faced by some of HSBC’s European peers.
Before Monday, HSBC shares had beaten the STOXX Europe 600 Banks Index by 3 percent this year. Favorable economic tailwinds should give Flint scope to ensure further outperformance.
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