HSBC Costs and Conduct Charge Overshadow $2 Billion Buyback

(Bloomberg) -- John Flint is off to a bumpy start at HSBC Holdings Plc.

Costs at Europe’s largest bank rose at a quicker pace than revenue in the first quarter and it took a surprise charge for past misconduct. HSBC also said a $2 billion share buyback would be the only one this year given the “growth opportunities,” signaling the bank plans to reinvest the excess capital rather than return it to investors. Some analysts had expected $4 billion or more to be repurchased.

The results add pressure to Chief Executive Officer Flint, who took over in February, to devise a plan that contains costs while growing the global behemoth. While the HSBC lifer inherited an Asia-focused lender back in expansion mode after years of restructuring, profitability continued to lag behind rivals in the quarter.

“The reality is Asia is where the economic growth is: rates, demographic, GDP,” Flint said in an interview, when asked about HSBC’s increasing reliance on the region. “The wealth creation is happening in Asia. So is it a concern? I don’t think so.”

HSBC’s best regional performance came once again came from Asia, and Hong Kong in particular, where it’s redeploying as much as $100 billion of capital. First quarter pretax profit there increased by 8 percent and now accounts for four-fifths of earnings, whereas profit in North America and Europe dropped by 16 percent and 72 percent respectively.

Among HSBC’s main four business lines, profit from retail, commercial and private banking rose, while earnings at the investment banking fell, largely because of a 10 percent drop in revenue from trading. Analysts had been expecting better after an average rise of 12 percent for U.S. peers and an 8 percent increase at London rival Barclays Plc.

While revenue and profit largely met expectations for the first three months of the year, costs rose 8 percent on an adjusted basis, compared with only a 2.5 percent rise in revenue. HSBC also unexpectedly set aside $897 million related to a U.S. investigation into the historic sale of toxic U.S. mortgage bonds.

“We are engaged in active discussions with the Department of Justice with a view toward potential resolution of civil claims,” and had taken as a provision because negotiations had “developed” during the last quarter, the lender said in a statement.

HSBC shares fell 3 percent in London at 10:11 a.m., the biggest fall in more than two months.

One of Flint’s main concerns will be improving HSBC’s return on equity, which came in at 7.5 percent in the quarter, lower than its target of 10 percent and below the last-reported levels at its closest western rivals in size, JPMorgan Chase & Co. and BNP Paribas SA. Emerging-markets rival Standard Chartered Plc also posted a 7.6 percent ROE earlier this week.

The CEO said he believed he had the capacity to invest in new technology while keeping a lid on costs and could achieve positive jaws -- the difference between the rates of revenue and cost growth -- by the end of the year. However, achieving a 10 percent return for 2018 “looks difficult,” Finance Director Iain Mackay said on a call with reporters.

The chief reiterated he would unveil his strategic update “at or before” the bank’s next set of results, scheduled for August, and said he’d enjoyed his two months in charge so far, particularly the warm reception he’s had from Asian tycoons that have been doing business with HSBC for decades .

“The challenge is just the prioritization thing, I’m drinking from a proverbial fire hose,” Flint said. “I’ve been here forever, but this is a different job, and I’m just getting into that rhythm.”

To contact the reporters on this story: Stephen Morris in London at smorris39@bloomberg.net, Alfred Liu in Hong Kong at aliu226@bloomberg.net.

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Jon Menon, Darshini Shah

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