Core views

HSBC Holdings' performance in the first half of the year exceeded expectations and is more positive in terms of future performance guidance. For future performance guidance, the company raised its 24-year Banking NII forecast to $43 billion, while lowering its credit cost guidance to 0.3%-0.4%, and extending the 24-year double median ROTE target to 25 years. Driven by strong interest rate hedging, interest spreads, continued credit cost pressure drop, and stable operating costs, the company is expected to hedge against the impact of the upcoming downward interest rate cycle to a certain extent. At the same time, the 3 billion dollar repurchase plan for the third quarter was implemented as scheduled. Assuming a total repurchase scale of 10 billion US dollars in 24 years, the total shareholders' cash return corresponding to a dividend rate of 15.3% was as high as 15.3%, and the advantage of high dividends is remarkable.

occurrences

On July 31, HSBC Holdings disclosed its 2024 semi-annual report: 1H24 achieved revenue of 37.29 billion US dollars, an increase of 1.1% (1Q24:2.9%); net profit to mother was 17.11 billion US dollars, a decrease of 2.3% year over year (1Q24: -1.6%). 1H24 ROTE was 21.4%.

The 2Q24 non-performing rate increased by 14bps to 2.4% quarter-on-quarter; provision coverage fell 5.1pct to 46.2% quarter-on-quarter. 2Q24 DPS of $0.1, cash return of $0.26 per share.

Brief review

1. 1H24 revenue growth exceeded expectations, and Banking NII contributed a steady increase, accounting for an increase in revenue share. HSBC Holdings 1H24 achieved revenue of 37.292 billion US dollars, an increase of 1.1% year over year. Excluding one-time effects such as the sale of major projects and strategic transactions, revenue increased 3.3% year over year, which is in line with expectations. Specifically, HSBC 1H24 achieved net interest income of 16.911 billion US dollars, a year-on-year decrease of 7.4%. On the one hand, there was a negative impact of selling Canadian and French businesses, and on the other hand, the increase in deposit costs due to deposit regularization dragged down interest spreads. Looking at net interest income from bank books (Banking NII), HSBC Holdings 2Q24 BankingNII was 22.2 billion US dollars, up 1.4% year over year, accounting for an increase of 5 pct to 59.5% of total revenue compared to the first quarter. In terms of non-interest income, HSBC 1H24 achieved a median income of 6.2 billion US dollars, an increase of 1.9% over the previous year, mainly due to the contribution of wealth management business. In particular, revenue growth in Hong Kong, China was strong in the first half of the year, but the disposal of the Canadian business and foreign exchange conversion had an adverse impact of about 0.3 billion US dollars, which dragged down the overall revenue growth rate. Furthermore, benefiting from the high overseas interest rate environment, the investment income of HSBC Holdings' trading books increased by 29.6% year over year. Even after excluding internal borrowing costs, HSBC's investment income increased by about 16.8% year over year.

Profit before tax exceeded expectations, and the drop in credit impairment losses was the main contribution. ROTE remained at a high level of 21.4% in the first half of the year. HSBC Holdings 1H24 achieved pre-tax profit of 21.556 billion US dollars, a slight decrease of 0.5% year over year, exceeding unanimous market expectations. Net profit to mother was $17.112 billion, down 2.2% year over year. While the cost-revenue ratio remained basically stable, ECL fell sharply by 20.7% year on year, which strongly supported the release of profits. ECL's pressure drop was mainly due to lower real estate impairment in mainland China and poor returns from major customers. 1H24 HSBC ROTE remains at an all-time high of 21.4%. As the company continues to lose pressure drop impairment and steady cost growth, it is expected that HSBC will be able to easily achieve its double median ROTE target throughout the year.

Overall, the performance guidance was more positive, exceeding market expectations: 24-year banking NII expectation+credit cost guidance downgraded+medium double-digit RoTE guidance continued to 25 years. HSBC updated its performance guidance in its mid-year report. The overall situation was more positive than the guidance at the beginning of the year, reflecting management's confidence in future business conditions. The three guidelines have been adjusted this time. First, the company raised the banking NII guidelines for the full year of 24, from 41 billion US dollars to 43 billion US dollars, but it is also clear that this guidance still depends on the trend of the global interest rate environment. At present, one of the company's guidelines for raising BankingNII is that the profits of existing structured hedging products can boost net interest income to a certain extent. According to the company's disclosure, interest rate hedging instruments of about 55 billion US dollars and 105 billion US dollars will expire in 2H24 and 2025, respectively. The average interest rate level is 2.8%, which is far higher than the current level of interest spreads, which will help hedge against downward pressure on interest rates. Through interest rate hedging, the impact of the current 100 bps interest rate cut on the company Banking NII has been reduced from 7 billion dollars to 2.7 billion dollars. On the other hand, the company confirmed that the sale of the Argentine business will be completed in the second half of '24, and these transactions are expected to contribute 1 billion dollars. Considering that the current market's expectations for interest rate cuts are significantly lower than at the beginning of the year, it is expected that the downward pressure on net interest spreads in the second half of the year will be significantly better than expected at the beginning of the year. With the support of margin hedging tools, it is highly certain that HSBC will reach the banking NII target of 43 billion US dollars for the whole year. Second, the company lowered its 24-year credit cost guideline, from around 0.4% at the beginning of the year to between 0.3%-0.4%. The company's guidelines for reducing credit costs are mainly due to the basic stabilization of real estate risk exposure in mainland China. In addition, there is the upgrading of sovereignty in some emerging market countries and the release of provisions due to bad take-back by a major European customer. Furthermore, the company reiterated its guideline to maintain a 24-year increase in operating costs of 5%. As a result, the company is expected to maintain the double median ROTE level for 25 years, driven by strong interest rate hedging supported by interest spreads, continued credit cost pressure drop, and stable operating costs.

2. The size of the bank traded by HSBC Holdings has grown strongly, revenue has remained stable, and the logic of volume compensation is smooth. The revenue of the 1H24 HSBC Holdings trading bank reached 13.165 billion US dollars, the same as the previous year, accounting for around 39.3% of total revenue (excluding the one-time impact of sales of key projects such as Canada and Argentina, same below). Among them, net interest income and non-interest income were 7.971 billion yuan and 5.194 billion yuan respectively, corresponding to contributing 47% and 30% of total net interest income and total non-interest income, respectively. Looking at the specific business line, global trade finance (GTS) revenue declined slightly by about 1% year over year, mainly affected by certain seasonal pricing factors, but the scale continued to grow rapidly. In 2Q24, the scale of global trade finance loans reached 87 billion US dollars, a sharp increase of 6.1% from quarter to quarter, and the growth rate was significantly higher than in previous quarters. Revenue from the securities services (SS) business remained flat, or was related to falling product rates, but the scale of asset custody continued to grow rapidly. In 2Q24, the total assets managed by HSBC reached 10.1 trillion US dollars, an increase of 2% over the quarter. The global payment and cash management business (GPS) continued to grow well, with a year-on-year growth rate of 3%, mainly benefiting from increasing trade volume and demand for capital transfers. In terms of foreign exchange business (FX), foreign exchange revenue in the second quarter improved markedly compared to 1Q24. Foreign exchange revenue in 2Q24 increased 3% year-on-year and month-on-month, driving 1H24's foreign exchange revenue decline to 8% year-on-year. Judging from the factors contributing to business revenue, the decline in pricing due to seasonal factors has dragged down the revenue growth of some transaction banks, but the rapid increase in scale has hedged the downward price factors, and can still guarantee that the revenue of trading banks contributes to stable revenue, and the logic of price compensation by volume works smoothly.

Multinational corporate customers and cross-border revenue are still core increases for transaction banks. 61% of the public revenue of 1H24 HSBC Holdings comes from the multinational corporate customer base, and 63% of the revenue from multinational enterprise customers comes from cross-border revenue. According to the company's disclosure, the revenue brought by multinational customers is significantly higher than that of local customers, and if multinational customers trade and transfer funds across borders, the more countries and regions involved, the higher the cross-border revenue they bring. Under the current trend of industrial transfer, diversified trade trends in emerging market regions such as ASEAN, the Middle East, and Mexico and core regions of the industrial chain such as China, the United States, and Europe are becoming more obvious. Continued strong demand for cross-border business will help HSBC increase the size and pricing capacity of its trading banks, thereby hedging downward pressure on interest rates.

3. The wealth management business is developing strongly, and the number of wealth customers in Hong Kong continues to grow. 1H24 HSBC Holdings' wealth management business revenue reached 2.144 billion US dollars, a sharp increase of 11% over the previous year, which strongly supported the growth of middle income. Among them, financial management, private banking, insurance and asset management increased by 16%, 26%, 8%, and 3%, respectively. The sharp increase in financial management and private banking revenue was mainly due to the strong growth of the customer base in Hong Kong in the first half of the year. The number of wealth customers in 1H24 Asia increased by 26% year-on-year, mainly due to the growing demand for cross-border financial management from customers in mainland China. The huge new customer base in the Asian region brought in a net additional wealth management scale of 19 billion US dollars in 2Q24. By the end of the second quarter, the total volume of HSBC AUM reached 1.27 trillion US dollars, up 15.9% year on year. Among them, AUM in Asia reached 606 billion US dollars, an increase of 20.5% year on year.

4. Deposit regularization continues to drive up debt costs, and HSBC Holdings' net interest spread fell slightly by 1bp to 1.62% from quarter to quarter. HSBC Holdings' net interest spread for 2Q24 was 1.62%, a slight margin of 1bp from quarter to quarter. The 1H24 net spread was 1.62%, down 8bps year over year. The main factor in the decline in net interest spreads is still the trend of deposit regularization in Asia and Europe. According to the company's disclosure, every 3% of demand deposits transferred to term deposits will increase interest expenses by 0.5 billion US dollars, so rising debt costs have a certain impact on net interest spreads. Based on the net interest income of bank books after deducting internal borrowing costs in financial market operations, 1H24 HSBC Holdings Banking NIM was 2.12%, an increase of 9 bps over the previous year.

Looking at both asset sides separately, the scale of asset-side 2Q24 loan investment remained stable, with a slight increase of 0.5% over the quarter. Excluding the impact of the strategic sale of business in Canada and Argentina, the year-on-year increase was 2%. Looking at the upward trend in loan investment, mortgage loans and unsecured retail loans increased by 3% and 6%, respectively. Among them, the main increase in mortgage loans came from the UK region, contributing an increase of about 6 billion US dollars, while unsecured retail loans in the UK, Asia, and Mexico each increased by about 1 billion US dollars. While regional investment is up, credit investment in Hong Kong is still relatively weak, down 4% year on year, while the Middle East and Mexico have increased 9% and 4% year over year respectively. It is expected that as the global industrial transfer process gradually progresses in the future, the increasing scale of trade and investment in emerging markets will bring more room for credit growth to HSBC Holdings. On the debt side, the trend of fixed-term deposits continues. The 1H24 HSBC deposit size increased slightly by 1.5% from quarter to quarter, remained basically the same year on year, and increased 2% year over year after excluding the impact of strategic sales. Currently, the main increase in retail deposits comes from the Asian region, with an increase of 19 billion US dollars over the same period last year, of which Hong Kong contributed 8 billion US dollars. In addition, mainland China, Taiwan, India, and Australia increased 30%, 28%, 21%, and 10%, respectively. However, the trend of deposit fixed-term deposits continues, and the share of time deposits in Hong Kong continues to increase by 1 pct to 39% from quarter to quarter.

5. Asset quality is relatively stable, and credit costs have dropped dramatically. Real estate exposure in mainland China continues to fall, and provision plans are sufficient. In 2Q24, the non-performing rate of HSBC Holdings increased by 14 bps to 2.40% from quarter to quarter; provision coverage decreased by 5.1 pct from quarter to quarter to 46.2%. The rise in the non-performing rate is related to the deterioration in the quality of retail credit assets in Mexico. The increase in the unemployment rate in Mexico in the first half of the year led to a decline in the ability of individuals to repay. Furthermore, due to the poor turnaround of a major European customer, the release of some provisions led to a slight decrease in provision coverage. The ECL calculated for 2Q24 was $0.346 billion, a sharp drop of 52% from quarter to quarter, and the credit cost ratio fell sharply by 14 bps to 0.15% from quarter to quarter. The credit cost ratio has maintained a unilateral downward trend for four consecutive quarters, and is currently far below the company's guidance expectations of 0.3%-0.4%. Looking at key risk exposures, mainland China's real estate exposure continued to drop sharply. As of 1H24, the total domestic housing exposure was only 9.403 billion US dollars, which continued to drop sharply by 22.5% from the beginning of the year. Among them, non-performing loans were 2.882 billion US dollars, down 10% from the beginning of the year, and the overall domestic housing defect rate remained around 30%. As the pressure on non-performing loans gradually dropped, the domestic housing provision coverage rate increased by 5 pct to 69% compared to the beginning of the year. Among them, the coverage rate for unsecured bad exposure reached 79%, and the provision plan was quite adequate. At present, it is expected that the real estate situation in mainland China is gradually stabilizing under policy impetus, and the stage of large-scale exposure of adverse events has passed. As HSBC's domestic housing risk exposure continues to be cleared, it will continue to drive improvements in HSBC's credit costs.

The $3 billion repurchase plan for the 6th and 3rd quarter was implemented as scheduled, and the advantage of high dividends was remarkable. HSBC Holdings normally paid a dividend of 0.1 US dollars per share, combined with the 3 billion yuan share repurchase completed in the second quarter. The cash return from HSBC Holdings 2Q24 reached 0.26 US dollars/share. In the first half of the year, the total cash repurchase was 0.68 US dollars/share. The shareholder return was extremely high. Looking ahead to the third quarter, the $3 billion share repurchase plan will be implemented as scheduled. Combined with the normal quarterly dividend of 0.1 US dollars per share, it is estimated that the cash return for the third 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 10 billion US dollars in 2024, the total return on shareholders' cash will reach 112%, and the dividend rate corresponding to the current stock price is 15.3%. The high dividend advantage is significant.

7. Investment advice: HSBC Holdings' performance in the first half of the year exceeded expectations and is more positive in terms of future performance guidance. As for future performance guidance, the company raised its 24-year Banking NII forecast to 43 billion US dollars and lowered its credit cost guidance to 0.3%-0.4%. Based on this, the company continued the 24-year double median ROTE target to 25 years, showing confidence that HSBC can hedge against the impact of the downward interest rate cycle to a certain extent. Driven by strong interest rate hedging, interest spreads, continued pressure drop in credit costs, and stable operating costs, the company should also be expected to reach the double median ROTE level in 25 years. At the same time, the 3 billion dollar repurchase plan for the third quarter was implemented as scheduled. Assuming a total repurchase scale of 10 billion US dollars in 24 years, the total shareholders' cash return corresponding to a dividend rate of 15.3% was as high as 15.3%, and the high dividend advantage was remarkable.

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. Revenue growth in 2024-26 is expected to be 1.0%, 0.4%, and 0.6%, respectively, and profit growth rates 0.9%, 0.2%, and 1.2%, respectively. ROTE is expected to remain in the 14.6%-15% range in 2024-26. With strong support from performance, the dividend level is stable and sustainable. The current valuation is 1.05 times 24-year P/TB (0.98 times 24-year P/B), maintaining the buying rating and leading position in the banking sector.

8. 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.