HSBC Profits Rise as U.K. Outlook Spurs Credit Loss Reversal

HSBC Holdings Plc posted its best quarter since the pandemic began as an improving economic outlook drove optimism about the ability of borrowers to repay loans and its strategic reset to Asia remained on track.

First-quarter profit more than doubled as a net $435 million worth of loan loss reserves were released, spurred by the rollout of vaccination programs in markets like the U.K. Europe’s largest bank said its increasing focus on servicing wealthy Asians had also got off to a strong start.

Adjusted pretax profits of $6.4 billion for the three months to the end of March comfortably beat analysts’ forecasts. The firm’s investment bank joined rivals in benefiting from active markets, as a 55% surge in equity trading helped lift the division’s revenue.

HSBC Profits Rise as U.K. Outlook Spurs Credit Loss Reversal

“The economic outlook has improved, although uncertainties remain,” Chief Executive Officer Noel Quinn said in a statement. “We carry good momentum into the second quarter.”

Easing credit losses helped it turn around its U.K. business and it also posted a profit in the U.S. even as it embarks on shifting billions of dollars to Asia. Weighed down by low interest rates, HSBC is seeking out more fee-based income, targeting to become a leader in wealth management in an increasingly affluent Asia.

HSBC’s shares were up 1.5% at 10:23 a.m. in London. Shares rose as much as 2.99% in Hong Kong trading.

Asia continued to be its biggest profit center, but earnings there were relatively unchanged from a year earlier. It saw jumps in profit at all of its major divisions.

The bank has unveiled one of the most radical responses to the pandemic that emerged early last year, with plans to cut its workforce by about 35,000 to drive down costs. Even so, expenses rose in the period, driven higher by restructuring charges and performance-related pay.

Credit Reversal

With the virus starting to be contained in major markets, HSBC was boosted by the reversal in credit losses. In 2021, such losses are now seen below the medium-term range of 30 basis points to 40 basis points of average loans it indicated at its latest annual results, the lender said.

HSBC pointed to a markedly improved outlook on the U.K. as the largest single factor in the write backs of bad debt charges. Speaking on a call with reporters, Quinn highlighted the success of the British vaccination rollout in boosting the economy. “That has created the foundation stone for a strong economic recovery,” he said.

HSBC Profits Rise as U.K. Outlook Spurs Credit Loss Reversal

However, Quinn said the bank was watching closely developments in India, which has seen an upsurge in infections. “We have to see how the pandemic develops in India, and we are watching very closely,” he said.

The bank said that it’s continuing negotiations on a potential sale of its retail operations in France. In the U.S., it’s exploring “both organic and inorganic options for our retail banking franchise,” according to the bank.

While attention has focused on the businesses HSBC is attempting to sell, Chief Financial Officer Ewen Stevenson said the bank was actively looking at possible acquisitions, mainly focused on its Asian wealth business, which is at the heart of its strategic repositioning. Asked about Citigroup Inc’s sales of parts of its Asian business, Stevenson said “very few of them” would be a good fit for HSBC. “We are looking at other options in the region, predominantly in the wealth space,” Stevenson said in a Bloomberg Television interview.

Dual Hubs

As part of its pivot to Asia, HSBC confirmed this month that three of its top executives would relocate to Hong Kong, meaning that most of the bank will be run from the region on a day-to-day basis. ”We will increasingly run the bank as a dual-hub model across Hong Kong and London,” said Stevenson. “Shifting more capability to Asia is a clear strategic priority.”

Quinn said the bank had transferred a number of sector specialists and product specialists into Asia.

The overhaul has met local resistance. Some senior executives in Greater China worry their push into the world’s second-largest economy could be slowed by added bureaucracy and blurred reporting lines, Bloomberg News has reported. Stevenson denied the clash on Tuesday, saying the region is very supportive of the move.

HSBC has also spent the past year adapting its working practices as a result of the pandemic. Quinn said this month that he would turn the entire executive floor of the London HQ into meeting rooms, and the bank eventually aims to cut its office space by about 40%. It revealed on Tuesday that it aims to cut its global office footprint by about 20% this year.

Quinn said on the call with journalists that the bank’s London offices were likely to face a deeper cull than its sites in Hong Kong. However, the HSBC boss said that the U.K. remained a good place for the bank to be headquartered and that were no plans to revisit the company’s domicile arrangements.

The bank is also cutting back on business travel. Speaking in an interview with Bloomberg, Stevenson said staff would take fewer longer trips.

“From a budgeting perspective, we have baked in a travel budget that is half as much as it was previously.”

©2021 Bloomberg L.P.

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