HSBC, Europe's largest bank with a focus on Asia, reported an increase in first-half pre-tax profit but investors are wary about the impact of its high operational cost, the US-China trade war, hundreds of millions worth of settlement for a U.S. mortgage case, and tumbling profits across other regions.
HSBC reported a pretax profit of $10.7 billion in the six months through June, a 4.6 percent increase from the year-ago period. Asia represented 88 percent of the total profit, jumping 23 percent to $9.4 billion. Overall, the reported earnings beat analysts' estimates of $10.38 billion.
The bank also said that revenue rose 4 percent year-over-year to $27.29 billion in the first half of the year. This was also above Reuter's estimates of $27.63 billion.
Most of its earnings came from retail banking and wealth management, and commercial banking according to John Flint, HSBC Chief Executive. Both of these avenues continued to post gains from a favorable interest rate environment, according to Flint.
Analysts, however, are lukewarm about HSBC's adjusted revenue gain of 2 percent as the bank has also increased its operational cost by 8 percent, sending jaws (jaws ratio = Income Growth Rate - Expense Growth Rate) to a negative 5.6 percent.
To be exact, operating expenses grew to $17.5 billion in the first half of 2018 compared to $16.4 billion in the same period in 2017. HSBC, under Flint's new leadership, laid out a three-year plan in June to invest $15-17 billion in digital capabilities across regions and separate developments focused entirely in China. The bank had also spent a significant amount on hiring more frontlines and growing its digital capabilities.
Flint said HSBC had not experienced direct impact of the mounting US-China trade war. He was, however, concerned that the loud talks and negative trade predictions on trade will affect the bank's investors.
Indeed, analysts and investors feel that HSBC's current move to focus its efforts on China looks like bad timing.
"HSBC is struggling to convince that its current restructuring to pivot the group toward Asia is delivering the hoped for pick-up in growth," Steve Clayton, manager of the Hargreaves Lansdown UK Income Shares fund, told Reuters.
Bloomberg also noted that despite HSBC's reported overall gain, declining profit shares in the Asian market, in general, would only offset it. More importantly, there had been a 12 percent decline in revenue in Hong Kong which is supposed to be HSBC's top market.
In the United States, HSBC had to pay for a $765 million settlement on allegations that the bank engaged in "mis-selling" of its U.S. mortgage securities.
On the other hand, some analysts remained optimistic that HSBC will recover in its bottom line. One of them is Dickie Wong, executive director of Kingston Securities. He told CNBC he predicts HSBC to report a 5 percent gain in its next pre-tax profit report.
"First of all, we see a clear tendency everywhere, not just in Hong Kong, for interest margin to be improving. And also, HIBOR (Hong Kong Interbank Offered Rate) is on a good track, so I think HSBC can make a comeback after the slight drop in the first quarter," Wong said.
