HSBC Revenue Trails Estimates as Flint Seeks Growth in Asia

(Bloomberg) -- HSBC Holdings Plc is struggling to produce any significant revenue growth from its long-term bet on Asian markets.

HSBC on Monday said second-quarter adjusted revenue advanced 2 percent from a year earlier to $13.7 billion, below the average estimate among three analysts surveyed by Bloomberg. Costs, meanwhile, increased 7 percent as Flint stepped up investments in areas such as technology. The shares gave up some earlier gains after the results were announced.

John Flint, promoted to chief executive officer in February, plans to grow the global behemoth by expanding in key Asian markets including China and establishing the lender as a top-tier wealth manager. Flint’s plan earlier this year to invest $17 billion to build its presence in the region and improving technology was met with a lukewarm reception, amid concern about how long cost growth would outpace revenue and hold back the dividend.

HSBC shares were up 0.5 percent at 1:37 p.m. in Hong Kong, after rising 1.5 percent ahead of the midday trading break. The stock has slipped 9 percent this year.

Like U.K. rival Standard Chartered Plc, HSBC has struggled to consistently deliver revenue gains that outpace cost increases -- what analysts refer to as positive jaws. Still, Flint expressed optimism that revenue gains will pick up, allowing HSBC to fulfill a promise to deliver positive jaws for the full year.

Flint Confident

HSBC’s net interest margin, a measure of loan profitability, rose 3 basis points to 1.66 percent in the first half from the previous six months, led by gains in Asia. The region accounted for two-thirds of adjusted pretax profit in the first half.

“The significant benefit we have this year is the balance sheet has grown and net interest margin is expanding,” Flint said in a phone interview on Monday. “Both factors give us confidence that the net interest income for the group should continue to grow through the second half of the year.”

Jefferies analysts led by Joseph Dickerson took a more cautious view, calling the 2 percent group-level revenue growth “paltry” and saying in a note that the stock is “likely to be in a holding pattern until evidence of delivery on operating leverage.”

HSBC has defended the increased investments and costs as necessary to exploit Asia’s growth potential, and that of China in particular. Finance Director Iain Mackay said in an interview with Bloomberg Television that costs are “absolutely in line” with where the company expected to be, adding that HSBC is being deliberate about investing in areas where it expects growth.

“We are sitting in a pretty sensible place,” he said.

Pretax profit on an adjusted basis was $6.11 billion, slightly ahead of the $6.05 billion average estimate of analysts surveyed by HSBC. The company announced a second-quarter interim dividend of 10 cents a share. HSBC also announced a $765 million penalty in the U.S. over a probe into residential mortgage-backed securities.

Other highlights from the second-quarter results:

  • Adjusted operating costs were $8.1 billion, 7 percent higher than year earlier
  • Lending rose 3 percent from first quarter to $26 billion
  • Common equity Tier 1 capital ratio rose to 14.2 percent
  • Reported pretax profit rose 13 percent year-on-year to $6 billion

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