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HSBC conditions stabilise, but not one to bank on just yet

London, United Kingdom - February 03, 2019: Sun shines on world Headquarters of HSBC Holdings plc at 8 Canada Square, Canary Wharf. It's 7th largest bank worldwide and was established in 1865

HSBC reported an 11% decline in third quarter revenues, now at $11.9bn. That was driven by the effect of lower interest rates on interest income, with revenues from lending down 14.8%.

That in turn led fall 36% in profit before tax tear-on-year, which came in at $3.1bn. That was largely driven by the lower revenues, with impairments for bad loans in the quarter some 11% lower than the same period last year.

The board “will consider whether to pay a conservative dividend for 2020”, with any decision to be announced alongside full year results in February.

HSBC shares rose 5.7% in early trading.

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“These are difficult times to be a bank – low interest rates are squeezing incomes on one side and bad loans push up the cost line on the other. However, there are signs conditions are stabilising and that’s given the HBC board the confidence to float the idea of a “conservative” dividend at the end of the year.

The flattening out of bad loan provisions stands out to us as particularly notable. While we suspect high levels of government support in the UK and internationally are playing an important role in keeping defaults down for now, the bank also thinks the longer term economic outlook has improved. Interest rate pressure is here to stay though, and all things being equal that will hold back revenue growth.

However, HSBC’s management think they have some self-help measures to hand to keep the bottom line moving forwards even if conditions remain tough. The bank now expects to beat its original $4.5bn cost saving target by 2022, and is also recycling assets from lower returning markets like the US to regions where it thinks it can earn higher profits. If it can navigate that transition successfully HSBC should generate attractive returns and we’d expect a large portion of those profits to come back to shareholders as dividends. Exposure to high growth markets in Asia could keep the bank ticking over for decades.

However, challenges remain, and on the dividend in particular we think any payment at the end of this year will be more nominal than substantial. HSBC may be a in a better place than some UK rivals longer term, but it’s not one to bank on just yet.”

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