2Q22 results notably beat our expectations
HSBC Holdings announced 2Q22 results: Revenue grew 1.6% YoY to US$12.77bn; net profit attributable to ordinary shareholders jumped 61.5% YoY to US$5.49bn. We believe the firm’s 2Q22 earnings substantially beat our expectations mainly due to improved net interest income driven by rising interest rates, effective control over operating expenses, better-than-expected provisions and a one-off gain on the recognition of a deferred tax asset.
Trends to watch
Improved NIM drove growth in revenue; loss of insurance-related business dragged non-interest income. In 2Q22, HSBC’s net interest margin (NIM) rose by 9bp QoQ or 15bp YoY to 1.35%, driving net interest income up 13.2% YoY. In the same period, non-interest income decreased 11.1% YoY, with net fee income declining 8.5% YoY mainly due to sluggish wealth management business in Asia. Other non-interest income fell 14.1% YoY, largely reflecting a loss of US$378mn recorded by insurance manufacturing related business on muted capital markets (vs. a profit of US$324mn in 2Q21).
Treasury management and financial market businesses remain active. By business, HSBC’s Global Liquidity and Cash Management (GLCM) and Markets & Securities Services (MSS) businesses were robust in 2Q22 thanks to interest rate rises and positive impact of market movements, driving adjusted revenue of Commercial Banking (CMB) and Global Banking and Markets (GBM) businesses up 19% and 15% YoY. Adjusted revenue of Wealth and Personal Banking (WPB) rose 5% YoY in 2Q22, mainly due to higher revenue of retail banking driven by rising interest rates. The wealth management business continued to weaken YoY because of unfavorable market impacts and COVID-19 resurgences.
Maintains stronger operating expense discipline. In 2Q22, HSBC’s operating expenses decreased 5.3% YoY, with adjusted operating expenses largely flat YoY. The firm expects to deliver US$1bn cost savings from expense reduction initiatives and US$2.4bn of cost to achieve (CTA). Looking to 2H22, we believe the firm’s CTA and sales of retail banking business in France may put its operating expenses under pressure in the near term. However, the firm maintains notably stronger cost discipline by historical standards over the medium and long term, in our opinion.
Credit cost remains low, to vary from 30bp to 40bp in 2022. In 2Q22, HSBC set aside US$448mn of provisions. Its credit cost in 1H22 totaled 0.20% mainly from exposure to the commercial real estate industry on the Chinese mainland. The firm expects its credit cost to vary in a range of 30-40bp in 2022. We believe credit cost may rise amid the anticipated macroeconomic downturn globally in 2H22. We expect HSBC’s credit cost to stabilize at 0.25% in 2022.
HSBC targeting a RoTE of at least 12% in 2023. At end-2Q22, HSBC’s common equity tier 1 (CET1) capital ratio equaled 13.6%, lower than its target range of 14-14.5% mainly due to OCI movement of some financial investments caused by rising interest rates. The firm modified its guidance and expects to bring its CET1 capital ratio back to 14-14.5% in 1H23. While further share buybacks remain unlikely in 2022, HSBC expects a dividend payout ratio of around 50% for 2023 and 2024. The firm has raised its return on average tangible equity (RoTE) target for 2023 to 12% from 10%, expecting profitability to improve notably going forward.
Financials and valuation
We raise our 2022 and 2023 earnings forecasts 43.4% and 12.4% to US$13.22bn and US$18.65bn, given the one-off gain on the recognition of a deferred tax asset and the firm’s effective control over expenses. The stock is trading at 0.8x 2022e and 0.7x2023e P/B. We raise our TP 8.9% to HK$62.32 (implying 0.9x 2022e and 0.9x 2023e P/B), with 20.2% upside. We maintain a NEUTRAL rating.
Risks
Interest rate increase falls short of expectations; global economic recession worsens.