Core views
HSBC Holdings' overall results for the first quarter were in line with expectations, and RoTE's operating target of US$4.11 billion and RoTE operating targets of around 15% for the whole year remained unchanged. According to the performance guidelines, HSBC's profit is expected to maintain a slight positive increase in 24 years. At the same time, the $3 billion equity repurchase plan for the second quarter exceeded expectations. Assuming a total repurchase scale of 9 billion US dollars in 24 years, the total shareholders' cash return corresponds to a dividend rate of 15.3%, with a significant high dividend advantage. In the long run, as the global industrial transfer process gradually progresses, the continuous increase in the scale of trade and investment can ensure that HSBC can effectively hedge against interest rate fluctuations. As a result, it has shown strong steadiness in terms of revenue growth, ROTE, dividend returns, etc., effectively frees from long-term restrictions on interest rate cycle types, and achieves continuous and stable valuation increases.
occurrences
On April 30, HSBC Holdings disclosed its 2024 quarterly report: 1Q24 achieved operating income of US$20.752 billion, up 2.9% year on year (2023:30.5%); net profit to mother was US$10.436 billion, down 1.6% year on year (2023:51.3%). The 1Q24 non-performing rate increased by 22bps to 2.26% quarter-on-quarter; the 1Q24 provision coverage rate decreased by 6pct to 51.26% quarter-on-quarter. 1Q24 dividend per share (including special dividends) of $0.31 and cash return (dividend+repurchase) of $0.42 per share.
Brief review
1. Revenue growth is in line with expectations. Banking NII's contribution is stable, and the performance of income and investment returns is excellent. HSBC Holdings achieved revenue of US$20.752 billion in 1Q24, an increase of 2.9% year on year. Excluding the one-time impact of sales of the Canadian and Argentine businesses, revenue increased 4.9% year over year, which is basically in line with expectations. Specifically, HSBC Holdings achieved net interest income of US$8.653 billion in the first quarter, a year-on-year decrease of 3.4%. This was mainly affected by a slight year-on-year decline in net interest spreads due to rising deposit costs. At the same time, loan size also declined slightly year-on-year due to falling demand in the Hong Kong region. However, if we look at net interest income from bank books (bankingNII, that is, net interest income after deducting internal borrowing costs from financial market operations on the expenditure side), HSBC Holdings' 1Q24 bank account net interest income was US$11.3 billion, up 10% year over year, up 5.6% from quarter to quarter, accounting for 54.5% of total revenue. While the federal funds rate remained high, it continued to grow rapidly, contributing to stable revenue. Due to the uncertainty of the Federal Reserve's monetary policy, the company's current performance guidance on maintaining net interest income of $41.1 billion in bank accounts remains unchanged in 2024.
In terms of non-interest income, HSBC Holdings achieved net fee revenue of US$3.146 billion in the first quarter, up 4.7% year on year, mainly due to outstanding performance in the wealth management business. Among them, the four major business lines of private banking, funds, asset management, and insurance income all achieved good growth, with year-on-year increases of 34%, 14%, 8%, and 3%, respectively. Furthermore, benefiting from the continued rise in bond interest rates and the strengthening of the stock market during the overseas interest rate hike period, HSBC Holdings' investment income in the first quarter increased by 25.2% year-on-year, which strongly supported revenue.
The profit growth rate declined slightly year over year due to the year-on-year increase in credit impairment losses and the increase in revenue and expenditure. HSBC Holdings achieved net profit of US$10.436 billion in 1Q24, a slight decrease of 1.6% year-on-year, and an annualized Rote of 27.4% in the first quarter, a slight decrease of 1.3 pct year-on-year. One aspect of the decline in profit is that the early impairment calculation base was low last year. Although 1Q24 HSBC Holdings expected credit impairment losses to be significantly lower than in the second half of last year, the low base effect still increased sharply by 67% year on year, and annualized credit costs increased by 13 bps to 0.3% year over year, which dragged down profit release to a certain extent. On the other hand, HSBC Holdings' operating expenses increased 7.4% year-on-year in the first quarter, mainly due to increases in employee remuneration and the costs of HSBC Innovation Bank (formerly Bank of Silicon Valley in the UK). Looking ahead to 24, according to the company's performance guidelines, HSBC Holdings' credit costs for 24 years will remain at 0.4%, while the year-on-year increase in operating expenses will be kept within 5%. Cost-side control is expected to be stronger in the next three quarters. According to the performance guidelines, HSBC Holdings' profit is expected to maintain a slight positive increase throughout the year, and the RoTE level remains stable at around 15%.
2. When one-time negative effects such as the devaluation of the Argentine currency were eliminated, the net interest spread of HSBC Holdings rebounded quarterly. The net interest spread of HSBC Holdings in 1Q24 was 1.63%, a significant increase of 11 bps from quarter to quarter. Specifically, the quarterly increase in interest spreads mainly benefited from the elimination of two one-time negative factors. On the one hand, the negative factors of the depreciation of the Argentine peso were removed, and on the other hand, the cash flow hedging for the first nine months of 23 years was reclassified. However, at the same time, deposits in Asia and Europe have moved to regularization since 2022. According to the company's disclosure, every 3% of current deposits transferred to fixed deposits will increase interest expenses by 500 million US dollars, so the increase in debt costs has dragged down the net interest spread to a certain extent, causing the 1Q24 net interest spread to drop 6 bps year on year. Based on the net interest income from bank books after deducting internal borrowing costs in financial market operations, 1Q24 HSBC Holdings Banking NIM was 2.21%, up 13 bps from quarter to quarter and 20 bps from year to year. While the interest rate cut cycle has not yet begun, the overall net interest spread of HSBC Holdings has maintained an upward upward trend.
On the asset side, the loan size declined slightly due to insufficient demand. In 1Q24, the loan size of HSBC Holdings declined by 3.2% year on year, and fell slightly by 0.6% from quarter to quarter. The decline in loan size was mainly affected by insufficient local demand for public credit in Hong Kong. The scale of local public credit in Hong Kong fell by US$4 billion from the beginning of the year.
However, on the other hand, benefiting from the gradual recovery of global trade, loan volumes in Asia, the Middle East, and Mexico increased by 3 billion, 1 billion, and 1 billion US dollars respectively from the beginning of the year. It is expected that as the global industrial transfer process gradually progresses in the future, the continuous increase in the scale of trade and investment will bring more room for credit growth to HSBC Holdings.
On the debt side, some time deposits in Hong Kong were transferred to financial management, and the share of time deposits stabilized for the first time since 2022. In 1Q24, the deposit size of HSBC Holdings declined slightly by 2.1% year over year and 2.6% from quarter to quarter, mainly due to a sharp decline in deposit size in Hong Kong. Deposits in Hong Kong fell by US$16 billion from the beginning of the year, with public and retail sales falling by $8 billion each. The decline in public deposits is mainly due to seasonal factors. Demand for corporate capital revitalization has increased since the beginning of the year, and outflows of public deposits have led to a month-on-month decline. However, the decline in retail deposits is mainly due to the transfer of some time deposits to financial management funds, which is beneficial to large wealth management businesses while also optimizing the deposit structure. The share of time deposits in the HSBC Hong Kong region ended a one-sided upward trend in 1Q24, and remained flat at 38% quarter-on-quarter for the first time since 1Q22.
3. Asset quality is relatively stable, and commercial real estate exposure in China continues to drop. It is expected that the credit costs of HSBC Holdings will not be greatly pressured in the future.
The non-performing rate of HSBC Holdings increased by 22bps to 2.26% quarter-on-quarter in 1Q24; provision coverage decreased by 6pct to 51.26% quarter-on-quarter. According to the 1Q24 calculation, credit impairment losses are expected to be US$720 million, down 30% from quarter to quarter. Credit costs have dropped significantly compared to the past four quarters, and overall asset quality is relatively stable. The continuing rise in the non-performing rate is mainly due to the fact that the poor stock of commercial real estate in China has not yet been cleared. In 1Q24, HSBC Holdings' exposure to commercial real estate in China fell 11.7% from the beginning of the year to US$10.731 billion, yet the total amount of non-performing loans remained basically flat at US$3.2 billion. Due to a drop in overall exposure pressure, the commercial real estate non-performing loan ratio increased by 4 pct to 30% compared to the beginning of the year, which led to an increase in the overall non-performing rate. However, since HSBC Holdings' provision for poor commercial real estate in China was sufficient in the early period, when there was no significant increase in the total amount of non-performing loans, 1Q24 HSBC Holdings only added 54 million yuan to anticipated impairment losses for commercial real estate in China, accounting for less than 1%. However, the level of provision coverage in the real estate sector still increased by 1.7 pct to 59.5% from the beginning of the year.
4. Benefiting from the trend of Chinese companies going overseas and the “China +1” restructuring of the global industrial chain, HSBC Holdings Trading Bank maintained steady growth and contributed nearly 40% of revenue. As the core growth point of HSBC Holdings' public business, in the current context of the gradual restoration of global trade, HSBC Holdings' transactional banking business maintained relatively steady growth. In 1Q24, HSBC Holdings' transactional banking revenue reached US$6.681 billion, accounting for around 40% of total revenue (excluding the one-time impact of sales of key projects such as Canada and Argentina, the same below). Among them, net interest income and non-interest income were 4,083 billion yuan and 2,598 billion yuan respectively, corresponding to contributing 47% and 30% of total net interest income and total non-interest income, respectively. Looking at specific business lines, global trade finance (GTRF) business revenue increased 5% quarterly; global payment and cash management (GPS) business revenue increased 7% year over year, mainly due to the continued rise in the scale of trade and investment in core markets and rising interest rates. By the end of March, exports to the core markets of HSBC's global trade chain, such as Hong Kong, Vietnam, Singapore, India, and Mexico, had increased by 12%, 15%, 8%, 5%, and 2%, respectively. As a result, the loan size related to HSBC's GTRF business increased 2.5% year over year to US$82 billion, of which GTRF loans in Asia increased 5.6% year over year to US$57 billion. Revenue from the securities services (SS) business remained flat quarterly, with a slight increase of 1% year over year. To a certain extent, it was dragged down by falling product rates, but the scale of asset custody continued to grow rapidly. The 1Q24 asset escrow scale increased 4.3% year over year and 1.9% quarter over quarter. On the foreign exchange business (FX) side, due to high exchange rate volatility in the same period last year, 1Q23 foreign exchange business revenue was relatively high. Under the high base effect, 1Q24 foreign exchange business revenue fell 17% year on year, but only declined slightly by 1% from quarter to quarter, and remained relatively stable.
5. The $3 billion repurchase plan announced in the second quarter exceeded expectations, and the advantage of high dividends was significant. In 1Q24, HSBC Holdings normally paid a dividend of 0.1 USD per share, and completed the sale of a special dividend of $0.21 per share for the Canadian business. Combined with the share repurchase of 2 billion yuan in the first quarter, HSBC Holdings distributed a cash return of $0.42 per share in the first quarter of '24, which is extremely high for shareholders. Looking ahead to the second quarter, HSBC Holdings announced that it will further develop an equity repurchase plan of up to 3 billion US dollars, adding a normal quarterly dividend of 0.1 US dollars per share. It is estimated that the cash return for the second quarter will also reach 0.26 US dollars/share. Looking at the whole year, the company's target dividend rate for 2024 is 50%. Combined with a one-time special dividend, the total cash dividend rate will reach 67%. Assuming a total share repurchase scale of $9 billion in 2024, the total return on shareholders' cash will reach 108%, and the corresponding dividend ratio is 15.3%, which has a significant dividend advantage.
6. Investment advice: HSBC Holdings' overall performance in the first quarter was in line with expectations, and RoTE's performance targets of US$4.11 billion and RoTE performance targets of around 15% for the whole year remained unchanged. According to the performance guidelines, HSBC Holdings' profit is expected to maintain a slight positive increase in 24 years. At the same time, the $3 billion repurchase plan for the second quarter exceeded expectations. Assuming a total repurchase scale of 9 billion US dollars in 24 years, the total shareholders' cash return corresponds to a dividend rate of 15.3%, with a significant high dividend advantage. In the long run, as the process of global industrial transfer gradually progresses, the continuous increase in the scale of trade and investment can effectively hedge against interest rate fluctuations. Combined with the additional addition of the retail wealth business, it is expected that HSBC Holdings will smoothly cross the upcoming European and American interest rate cut cycle, show strong steadiness in terms of revenue growth, ROTE, and dividend returns, effectively break free from the long-term constraints of interest rate cycles, and achieve continuous and stable valuation increases.
Assuming the completion of the Argentine business in 24, revenue growth rates are expected to be -3.1%, 2.3%, and 1.3% in 2024-26, respectively, and profit growth rates of 0.4%, 4.1%, and 5.1%, respectively. In 2024, the cash dividend rate was 67% (including a one-time special dividend of 17%), and the share repurchase scale was US$9 billion. The total return on shareholder cash was 108%, and the total dividend rate was 15.3%. ROTE is expected to remain in the 14.4%-14.6% range in 2024-26. With strong support from performance, the dividend level is stable and sustainable. The current valuation is 1.0 times 24-year P/TB (0.93 times 24-year P/B), maintaining the buying rating and leading position in the banking sector.
7. Risk warning: (1) The extent or time of the Federal Reserve's interest rate cut exceeded expectations. (2) The global macroeconomy has entered a new round of recession, or real estate companies in mainland China continue to be exposed to risks, affecting the asset quality of HSBC Holdings and leading to a sharp decline in profits. (3) The company's dividend rate may fall short of expectations due to special reasons such as policy restrictions. (4) Some regions where HSBC Holdings operates may have sovereign credit risk. (5) Global industrial transfers are uncertain, geopolitical frictions, or US industrial restrictions may hinder the globalization process, which in turn has led to a sharp decline in the scale of global trade and capital flows, causing the development of the company's transaction banking business to fall short of expectations.