Idea of the Week – Another year of record for HSBC

Prioritising strategic developments after yet another record year

Amidst falling interest rates in the final quarter of 2024, HSBC Holdings plc (“HSBC”) continues to see yet another record year for the full year of 2024 (“FY24”) with profits before taxes hitting a record high. Despite the great performance, HSBC remains forward-looking in terms of further improvement to the business, especially under the helm of a new Group CEO.

Mr. Georges Elhedery succeeded Mr. Noel Quinn as the Group CEO in September 2024, previously serving as the Group CFO and with almost 20 years of experience in HSBC. In the short three months as the Group CEO, Mr. Elhedery has called for significant restructuring and re-organisation across the Group. The moves were touted to make HSBC simpler, more agile and focused, all targeted to drive continued growth.

Particularly, the restructuring (effective 1 January 2025) saw the evolution of business divisions from the previous Wealth and Personal Banking (“WPB”), Commercial Banking (“CMB”) and Global Banking and Markets (“GBM”), to (1) Corporate and Institutional Banking, (2) International Wealth and Premier Banking, (3) Hong Kong and (4) UK. The restructuring of business divisions is expected to simplify the operational structure, and align it with HSBC’s longer-term strategy of growing the business. Concurrently with the restructuring, HSBC aims to de-duplicate roles across the newly integrated business divisions.

Financial Highlights

Revenue and profits are still up year-on-year

FY24 saw HSBC’s revenue and profit before taxes (“PBT”) seeing continued growth year-on-year (“YoY”), albeit facing challenges amidst falling interest rates and downward pressure on net interest margins (“NIM”). Revenue rose slightly by +1% YoY, up from USD 64.9b in FY23 to USD 65.9b in FY24. Meanwhile, PBT rose +6% YoY, up from USD 30.3b to USD 32.3b over the same period (Chart 1).

The USD 2.0b increment for PBT saw a USD 1.0b net favourable impact from notable items YoY. Major notable items for FY24 include a USD ~5b gain on the disposal of Canada banking business and USD ~6b losses from the sale of Argentina business. Excluding the notable items and on a constant currency basis, HSBC reported PBT growth of +4% YoY to USD 34.1b.

HSBC indicated a Return on Tangible Equity (“RoTE”) of 14.6% as of FY24, flat against the 14.6% observed for FY23. Excluding the notable items, RoTE is at 16.0% for FY24. The management has previously guided for a “mid-teens” RoTE excluding notable items, a target that enables the Group to provide a 50% dividend payout ratio which was attained for FY24. It continues to target the same for RoTE and dividend payout in the future, citing excess capital would potentially enable additional share buybacks.

Banking NII performed better than expected, fee and other income remains healthy

Excluding the impact from notable items, the underlying growth in PBT was primarily driven by higher revenue across WPB and GBM, offset by the increase in operating expenses. Particularly, we continue to see a rise in banking net interest income (“NII”) by +3% YoY (constant currency basis) from USD 42.4b (FY23) to USD 43.7b (FY24) – being the key driver for the higher profits in FY24.

While HSBC’s reported banking NII is largely flat (-0.8% YoY; -0.3% if excluding notable items), it stood much more resilient than initially expected across FY24 (Chart 2). For instance, NIM has fallen by 10 basis points (“bps”) YoY to 1.56%, in line with the falling interest rates in 4Q24, but the increased deployment of surplus into the trading book helped to mitigate the reduction in banking NII.

HSBC’s increased investments in the structural hedge have also provided a strong buffer for the banking NII. It reports a current position of USD 529b as of December 2024 for the structural hedge notional balance, up from USD 320b as of June 2022. This enabled a drastic reduction in banking NII sensitivity for a 100 bps down-shock, from a drop of USD ~7b to just USD ~2.9b across the same period of comparison.

Despite a projected decline in banking NII to around USD 42b in FY25, we believe HSBC is likely still able to enjoy robust earnings in the short term as the impact on banking NII should be largely negated by the substantial structural hedge position.

On the other hand, we see a stable fee and other income contribution across the year. For Wholesale Transaction Banking (within CMB), contributions are largely flat YoY (FY23: USD 10.5b vs FY24: USD 10.4b). For Wealth (within WPB), the contribution is up from USD 5.9b (FY23) to USD 7.2b (FY24). While HSBC might be more dependent on banking NII (~66% of revenue coming from banking NII in FY24), the stability across fee and other income should support HSBC’s overall earnings.

Chart 1: Revenue and PBT for HSBC over past years (USD b)

Chart 2: Quarterly Banking NII over FY23 and FY24 (USD b)

Outlook

Strategic developments enable further push for growth

The recent restructuring of operations shows a clear focus on the Group’s direction, particularly in Hong Kong and UK as the likely growth drivers for HSBC. These two are recognised as HSBC’s home markets and are prioritised to grow their customer base and market shares. Both Hong Kong and UK have been the stronger contributors to HSBC’s overall business – with FY24’s business represented into the restructured divisions, Hong Kong business sees a ~38% RoTE while UK is at ~25% RoTE, as compared to the Group’s overall 14.6% reported RoTE for FY24.

Alongside the strategic focus on home markets, the reallocation of capital and exiting less profitable businesses is expected to further support HSBC’s earnings. Capital from the divestment of assets will be re-invested in priority growth areas, with the divestments well on schedule. Across FY24, HSBC reported a number of divestments – France retail banking, HSBC Bank Canada, businesses in Argentina, Russia and Armenia, and the exit from Mauritius retail banking. Additionally, it announced the planned divestment of the private banking business in Germany and the life insurance business in France.

Several key deployments of investments have already been completed in FY24, generally with an emphasis on Asia markets. HSBC acquired Citi’s retail wealth management portfolio in Mainland China and also the SilkRoad Property Partners Group, an asset management firm focusing on real estate in Asia-Pacific. Beyond those, the management indicated that it has secured multiple additional licenses for the expansion of operations in Mainland China, and an approval to open bank branches in 20 new cities across India.

Cost management remains a priority for HSBC

In tandem with the restructuring, the simplification of business divisions allowed for further cost reductions. The newly established business divisions allow for a de-duplication of roles, enabling the reduction in management layers and the consolidation of overlapping roles. HSBC expects approximately USD 1.8b severance and other upfront costs to be booked across FY25 and FY26, but the Group is expected to benefit from net cost savings of USD 1.5b by the end of 2026.

Additionally, HSBC highlighted future plans to wind down merger & acquisitions (“M&A”) and equity capital market (“ECM”) activities in the UK, Europe and the US, subject to local legal requirements. Notably, these activities were reported to have annual costs of approximately USD 0.3b and are not materially profitable.

Overall, we expect HSBC’s earnings to remain mostly stable, supported by the recent strategic plans. We believe the growth drivers might be limited by the falling interest rates environment, especially given HSBC’s significant income contribution from banking NII. On the flip side, we do see cost savings potentially provide a positive impact on HSBC’s bottom line and ultimately allow HSBC to sustain elevated earnings.

Credit Highlights

De-risking of loan portfolio from Mainland China worked well for HSBC

HSBC continued with the reduction of commercial real estate (“CRE”) exposure to Hong Kong and Mainland China, falling by -15% and -30% YoY respectively (as of 4Q24). At the same time, we note slight improvements in the loan portfolio exposure to Hong Kong CRE – as of 31 December 2024 and across the full year, the weighted average loan-to-value ratio (“LTV”) fell from 54% to 46% for ‘sub-standard’ exposures and 71% to 58% for ‘credit-impaired’ exposures. This reflects the decline in lower-quality loans across the Hong Kong CRE loans book.

The expected credit losses (“ECL”) attributable to Mainland China CRE remained low across the quarters in FY24 (Chart 3). We believe the largely stable ECL charges from Mainland China CRE reflect well on the sentiments and HSBC’s efforts to manage the portfolio. As a result, we currently see minimal concerns for HSBC’s exposure to Hong Kong and Mainland China. If anything, the growing income contribution from Hong Kong should further offset any potential ECL coming from the region.

CET1 ratio at a high after dividends, share buybacks and regulatory changes

HSBC reports a Common Equity Tier 1 (“CET1”) ratio of 14.9% as of 31 December 2024, a slight increase from 14.8% as of 31 December 2023 (Chart 4). This meant a buffer position of 380 bps to the maximum distributable amount (at 11.1%) for HSBC, reflecting a strong capital position. The management has previously guided for a CET1 target ratio of 14.0% to 14.5% in the medium term while noting that a management minimum of 13.5% is to be upheld.

Despite relatively significant dividend payouts and share buyback schemes over FY23 and FY24, these were largely backed by strong capital generation capability, owing to the record profits. With earnings likely to stay elevated, we do not think the current capital redistribution plans back to shareholders would heavily impact the CET1 ratio. However, we think a revision of risk-weighted assets (“RWAs”) is likely to have a greater impact on the overall CET1 ratio – particularly if HSBC primarily determines the payout based on profits.

That being said, the management did indicate that the intended mid-teens RoTE growth will enable its current dividend payout plans (of 50% payout ratio) and some room for RWA. With capital redistribution plans (mainly the share buybacks and any special dividends) requiring approval from the regulatory authority and a substantial CET1 buffer, we do not see a cause for concern for any material decline in the CET1 ratio at the moment.  

Highly liquid position, with loans and deposits slightly higher

Liquidity position continues to be robust for HSBC. The liquidity coverage ratio (“LCR”) increased from 136% as of FY23 to 138% as of FY24, while the net stable funding ratio (“NSFR”) improved from 138% to 143%. We see the high-quality liquid assets (“HQLA”) remaining stable across the year as well, from USD 648b as of December 2023 to USD 649b as of December 2024. HSBC indicated that there is another USD ~140b worth of HQLA available that is not taken into the LCR calculations (covering ~48% of the total deposits).

Meanwhile, HSBC recorded small increments in both loans and deposits base across the year. Customer lending is up just slightly, from USD 917b as of 4Q23 to USD 931b as of 4Q24, with additional lending mainly contributed from the UK business. Deposits rose from USD 1,580b as of 4Q23 to USD 1,655b as of 4Q24. HSBC highlighted that their time deposits form a smaller proportion as compared to peers, which helped to support the Group’s banking NII. The Group also reports a lower loan-to-deposit ratio than most of its European and UK banking peers at 56%.

Chart 3: HSBC expected credit losses across FY24 (USD b)

Chart 4: HSBC CET1 ratio changes across FY24

Recommendations

Table 1: SGD Tier 2 subordinated bonds

Table 2: Recommended HSBC USD bonds

While HSBC still stands out within the SGD bond space, the wider credit spreads offered by the French banking Tier 2 bonds provide a more attractive proposition for now. We recently covered the French banks, which saw some fluctuations owing to the developments within France’s political scene. These banks are mostly similar to HSBC’s credit rating on Tier 2 subordinated bonds while offering a slightly better yield. We believe all the highlighted bonds above would be good considerations for investors seeking investment-grade bonds while attaining ~4% yield levels.

Generally, we compare based on the ‘yield to call’ for Tier 2 subordinated bonds, given the banking regulations which provides an incentive for issuers to redeem and refresh their capital on the call date. As such, we think it is reasonable for investors to consider the ‘yield to call’. We also wish to note the subordinated nature of the Tier 2 bonds, on top of the loss absorption features, which may not be suitable for risk-averse investors.

In Table 2, we also highlight some of the USD bonds we find to be attractive, offering a relatively good spread over the US Treasuries. Particularly, HSBC 5.546% 04Mar2030 Corp (USD) is available on our Bond Express platform, offered in smaller denominations of USD 5,000 for accredited investors. All the above bonds are senior unsecured bonds, with the exception of HSBC 5.874% 18Nov2035 Corp (USD) being a Tier 2 subordinated bond (rated slightly lower).

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in HSBC 5.546% 04Mar2030 Corp (USD), BNP 4.750% 15Feb2034 Corp (SGD) and HSBC 5.300% 14Mar2033 Corp (SGD),. The analyst who produced this report holds an NIL position in the abovementioned securities.