Core views

HSBC Holdings' third-quarter revenue and performance continued to exceed expectations, keeping the performance guidelines unchanged.

Growth in scale is already picking up, and interest spreads are mainly affected by the one-time redemption of a payable bond early. The two core businesses, transaction banking and wealth management, are still growing very strong.

Real estate exposures in mainland China and Hong Kong are gradually being cleared. The future will have little impact on credit costs. Recent changes in the organizational structure are also conducive to cost pressure reduction. Looking forward to the future, as the interest rate cut cycle begins, demand for credit and financial management is expected to improve. HSBC continues to contribute to growth through rapid growth in transaction banks and wealth management through expansion, stabilizing interest spreads, and reducing costs. Its performance is resilient during the interest rate cut cycle and can maintain a ROT E level of around 15%. Supported by stable profitability, the significant high dividend advantage is sustainable, and the allocation value is outstanding.

occurrences

On October 29, HSBC Holdings disclosed its 2024 three-quarter report: 9M24 achieved revenue of $54.29 billion, up 2.4% year over year (1H24:1.1%); net profit to mother was 23.628 billion US dollars, up 0.3% year over year (1H24: -2.3%). 9M 24 ROTE was 19.3%.

The 2Q24 non-performing rate increased 7 bps to 2.47% quarter over quarter; provision coverage decreased by 0.8 pct to 45.4% quarter over quarter. 3Q24 DPS of $0.1, cash return of $0.26 per share.

Brief review

1. 9M24 revenue growth exceeded expectations, continuing the positive trend in the first half of the year. Banking NII contributed steadily and the wealth management business grew strongly. HSBC Holdings 9M24 achieved revenue of $54.29 billion, up 2.4% year over year; of these, 3Q24 revenue increased 5.2% year over year, exceeding market expectations. Specifically, HSBC 9M24 achieved net interest income of 24.548 billion US dollars, a year-on-year decrease of 10.8%, mainly due to capital costs in transaction books. Looking at net interest income from bank accounts (Banking NII), HSBC Holdings' 3Q24 Banking NII was 32.8 billion US dollars, a slight decrease of 1.5% from the previous year, and its share of total revenue increased to 60.4%. BankingNII's decline was mainly affected by fluctuations in interest spreads. In the third quarter, there was a loss of 0.3 billion dollars due to early redemption of existing bonds, which affected the interest spread of about 5 bps at once. Furthermore, the cost of debt is still dragging down interest spreads under the deposit transfer trend. In terms of non-interest income, HSBC 9M24 achieved a median income of 9.3 billion US dollars, an increase of 2.6% year over year, mainly due to the sharp increase in revenue from wealth management business of 32% year on year. Among them, revenue from consignment, private banking, insurance and asset management businesses all grew strongly, and the number of customers and business volume in Hong Kong continued to increase. Furthermore, benefiting from the still high interest rate environment overseas, HSBC Holdings' trading book investment income maintained a high year-on-year increase of 25.9%.

Profit growth has surpassed expectations. The cost gradually dropped, and ROTE remained at a high level of around 20%. HSBC Holdings 9M24 achieved pre-tax profit of 23.628 billion US dollars, an increase of 2.3% year on year; net profit to mother was 23.628 billion US dollars, up 0.3% year on year. The profit growth rate corrected, improving from the 1H24 trend and exceeding the agreed market expectations. On the one hand, it benefited from a 1.3 pct month-on-month decrease in cost and revenue, and on the other hand, 9M24's ECL continued to drop sharply by 15.1% year on year, which strongly supported profit release. HSBC's ROTE remained at a historically high level of around 20% in the first three quarters, and HSBC was able to easily achieve its mid-double-digit RO TE target throughout the year.

The full-year results guidance remains unchanged. HSBC continued to maintain its previous performance guidance for the third quarter. Banking NII is expected to be around 43 billion US dollars for the full year of '24, and the fourth quarter is expected to be around 10.2 billion US dollars. Of this, 1 billion US dollars of revenue from the sale of the Argentine business will be included in the fourth quarter, but the revenue from the sale of the Argentine business may fluctuate. Furthermore, the 3Q24 USD 0.3 billion loss due to the sale of existing bonds has been taken into account in the guidelines. In terms of cost, the 24-year credit cost will continue to remain stable at 30-40 bps, and the cost increase will not exceed 5% on a comparable basis.

Looking ahead, HSBC is expected to maintain its excellent performance trend by increasing investment, stabilizing interest spreads, and reducing costs. Combined with the rapid growth of transaction banking and wealth management businesses, HSBC's ability to smoothly cross the interest rate cycle continues to increase. As the Federal Reserve's interest rate cut cycle begins, a recovery in credit demand+a recovery in global trade is expected to drive a gradual improvement in HSBC's credit investment. HSBC is expected to maintain a medium single-digit credit growth of around 5% in the medium to long term. In terms of interest spreads, the beginning of the interest rate cut cycle will drag down asset-side interest rates to a certain extent. However, on the one hand, the trend of shifting deposits to fixed-term deposits is expected to ease. In the third quarter, the share of time deposits in Hong Kong remained flat from quarter to quarter, and deposit costs, which continue to rise, will gradually drop. On the other hand, HSBC has made sufficient preparations for this interest rate cut cycle to stabilize interest spreads through structural hedging. According to the company's disclosure, HSBC's structural hedging scale has now reached $531 billion, an increase of $27 billion over 1H24. Among them, interest rate hedging instruments of about 30 billion US dollars and 115 billion US dollars will expire in 4q24 and 2025, respectively, with an average interest rate of 2.9%. In terms of non-interest income, the vitality of the global economy will improve after interest rate cuts begin, and the scale of trade and financial management demand will improve. Combined with diversification of global wealth allocation, HSBC trading banks and wealth management revenues are expected to maintain relatively rapid growth and contribute a steady increase. In terms of costs, the new CEO of HSBC has been committed to controlling costs since taking office. A series of organizational structure adjustments have helped reduce redundant operating costs and improve operating efficiency. As real estate risks are gradually cleared and credit costs remain in a stable range, the medium double digit ROTE level will continue to be maintained in 2025. In the long run, during this round of interest rate cuts, the 3% terminal policy interest rate means sufficient room for loan pricing and return on investment, strong credit demand and strong business operating vitality, and a better level of asset quality. As a high-quality global bank, HSBC will be in an ideal business environment. By increasing credit investment, reducing costs, and contributing to the two advantageous businesses of transaction banking and wealth management, the stability of ROTE and dividends can be achieved.

2. The non-interest income of HSBC Holdings Trading Bank grew strongly, while the scale expansion hedged the impact of interest rates and was highly resistant to cycles. The revenue of the 9M24 HSBC Holdings trading bank reached 19.815 billion US dollars, which was basically the same as the previous year, and remained around 39% of total revenue (excluding one-time effects, same below). Among them, net interest income and non-interest income contributed 48.5% and 30% of the company's total net interest income and non-interest income, respectively. Looking at a single quarter in the third quarter, transaction bank revenue fell 1% year on year. Among them, net interest income fell 5% year on year, and non-interest income increased 7% year on year. Looking at the specific business line, 3Q24 Global Trade Finance (GTS) revenue increased 2% year on year. Among them, net interest income and non-interest income increased by 1% and 3% year on year respectively, mainly due to the increase in business scale in most core regions. The 3Q24 global trade finance loan scale reached 89 billion US dollars, an increase of 5% year on year, and the business market share in Hong Kong increased 3.6 pct to 28.8% year over year. The growth of GTS fully reflects the improvement in global trade trends, and is expected to continue to drive transaction bank revenue growth in the future. The global payment and cash management business (GPS) declined 4% year over year, mainly driven by a 5% drop in net interest income, mainly due to price factors. However, non-interest income has maintained a positive growth of 4%, mainly due to the growing trend of capital transfers and new customer demand, and there is a clear trend of supplementing prices with volume. Securities Services (SS) business revenue declined 7% year over year, with net interest income falling 8% and non-interest income falling 6%, mainly hampered by the reduction in fund management business rates. However, the scale of asset custody continued to grow rapidly. In 3Q24, HSBC Bank's total assets under escrow reached 11 trillion US dollars, a sharp increase of 9% over the quarter. Foreign exchange business (FX) revenue increased sharply by 14% year over year, mainly contributed by non-interest income. Among them, net interest income decreased 3% year over year, and non-interest income increased 12% year over year. The increase in foreign exchange revenue was mainly due to fluctuations in the exchange rate market, and customer activity and demand increased markedly.

3. The wealth management business grew strongly, clearly exceeding expectations, and the number of wealth customers in Hong Kong continued to grow. 9M24 HSBC Holdings' wealth management business revenue reached 6.696 billion US dollars, a sharp increase of 16% over the previous year, which strongly supported the growth of middle income. Looking at the 3Q24 single quarter, wealth management business revenue was 2.36 billion US dollars, up 25% year on year and 9% month on month. The growth momentum was very strong. Among non-interest income, financial management, private banking, insurance and asset management increased 14%, 32%, 115%, and 13%, respectively, and increased 5%, 4%, 31%, and 11% quarter-on-quarter. The sharp increase in financial management and private banking revenue was mainly due to strong brokerage business and trading volume brought about by a strong growing customer base in the Asian region. With the increasing demand for cross-border financial management from mainland Chinese customers, the number of new customers in Hong Kong reached 0.243 million in 3Q24. The quarterly increase in the third quarter alone reached 70% of the number of new customers added in the first half of the year. The huge new customer base in Asia brought in a net additional wealth management scale of 26 billion US dollars in 3Q24. By the end of the second quarter, the total size of HSBC AUM reached 1.3 trillion US dollars, an increase of 6% over the quarter.

4. Due to the one-time impact of early redemption of a bond payable, HSBC Holdings' net interest spread fluctuated in 3Q24. Furthermore, deposit transfer trends continue to drive up debt costs and drag down interest spreads. HSBC Holdings' net interest spread for 3Q24 was 1.46%, down 16 bps from quarter to quarter. 9M24 net interest spread was 1.57%, down 13bps year over year. Excluding the impact of capital costs in transaction books, the 3Q24 HSBC Holdings Banking NIM was 2.03%, a decrease of 9 bps over the previous year, based on the net interest income of bank books after deducting internal borrowing costs in financial market operations. There are two main reasons for the decline in HSBC's net interest spread in the third quarter. First, an early redemption of a payable bond caused a loss of 0.3 billion US dollars, which affected the net interest spread at one time of about 5 bps. The cost of this payable bond is relatively high, and it can no longer be included in TLAC capital after regulatory policy adjustments. The significance of HSBC's continued holding is weak, so it is easy to pay it off in one fell swoop early to prevent a continuous drag on interest spreads. On the other hand, structural changes on both sides of the asset side continue to affect interest spreads. Credit investment on the asset side has increased, and the share of some current high-yielding investment assets has declined, causing asset-side interest rates to be affected to a certain extent. It is expected that this is mainly due to HSBC's gradual increase in credit investment as the interest rate cut cycle begins and credit demand recovers. The trend of regularizing debt-side deposits still exists, and debt costs continue to rise in a high interest rate environment, dragging down the level of interest spreads.

Looking at the increase in the size of both sides of the asset side, 3Q24 loans increased 4.7% year over year and 3.3% quarter over quarter. Looking at the upward trend in loan investment, credit investment in Asia and Hong Kong is still relatively weak, falling by 2 billion US dollars and 1 billion US dollars, respectively, from quarter to quarter, while the UK (fence bank), the US, Mexico, and the Middle East increased by 1%, 1%, 3%, and 1%, 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, 9M24 HSBC deposit size increased 4.2% month-on-quarter and 6.2% year-on-year. Currently, the main increase in deposits comes from the Asian region, with a quarter-on-month increase of 22 billion US dollars, and a growth rate of 3%. Of these, Hong Kong contributed 18 billion US dollars and increased 3% quarter-on-quarter. In addition, the UK (Fencing Bank), the US, and the Middle East increased by 1%, 6%, and 2%, respectively, from quarter to quarter. However, the trend of deposit fixed-term deposits is still relatively stable, and the share of time deposits in Hong Kong remains at a high level of 39%.

5. The quality of assets remains stable. Real estate exposures in mainland China and Hong Kong are gradually being cleared, and there will be little impact on credit costs in the future. The 3q24 HSBC Holdings non-performing rate increased by 7 bps to 2.47% from quarter to quarter; provision coverage decreased by 0.8 pct to 45.4% from quarter to quarter. The 3Q24 ECL was 0.986 billion US dollars, down 7.2% year on year, and the 3Q24 credit cost ratio (annualized) was 0.4%, which remained within the company's guidance expectations of 0.3%-0.4%. Of the 3Q24 ECL, about 0.6 billion US dollars came from mutual business, of which the Hong Kong regional ECL reached 0.4 billion US dollars. It is estimated that this is mainly due to the continued settlement of poor real estate in the Mainland and Hong Kong. The remaining $0.4 billion comes from retail loans, which are still expected to be related to Mexico's high unemployment rate and continued deterioration in the quality of retail assets.

Looking at key risk exposures, mainland China's real estate exposure continued to drop sharply. As of 9M24, the total domestic housing exposure was only 8.887 billion US dollars, which continued to fall sharply by 27% from the beginning of the year. Among them, non-performing loans were 2.994 billion US dollars, down 7% from the beginning of the year, and a slight increase of 4% from quarter to quarter. As the overall risk exposure pressure drops and defects continue to be gradually cleared, the overall domestic housing defect rate remained elevated to 33.6%. The domestic housing provision coverage rate increased by 6 pcts to 70% compared to the beginning of the year, and the provision plan is quite adequate. In terms of real estate in Hong Kong, according to the company's disclosure, the ECL for public real estate in Hong Kong was about 0.1 billion US dollars in 3Q24, which is significantly narrower than in the second quarter. Looking at it now, as Hong Kong begins to cut interest rates and mainland China's economic expectations improve, the economic environment that was suppressed earlier will gradually improve, and the cash flow trend and repayment capacity of real estate companies in Hong Kong will continue to pick up, and the future impact on HSBC's asset quality will not be significant. Continued clearance of domestic housing risk exposure will continue to drive HSBC's credit costs to remain low at 0.3%-0.4%.

6. In the fourth quarter (until the disclosure of the annual report), the repurchase amount of 3 billion was maintained. The repurchase amount for the full year of '24 reached 11 billion, and the high dividend advantage was remarkable. HSBC Holdings normally pays a dividend of 0.1 US dollars per share. Currently, the 3 billion yuan share repurchase has been completed in the third quarter. The cash return from HSBC 3Q24 has reached 0.26 US dollars/share. The total return for the first three quarters was 0.94 US dollars/share, an increase of 86.3% over the previous year, and the shareholder return is extremely high. Looking ahead to the fourth quarter, the $3 billion share repurchase plan will continue. When combined with a 50% annual dividend rate, it is estimated that the fourth quarter dividend will be $0.35, then the cash return for the fourth quarter will also reach $0.51 per 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%. With a total share repurchase scale of 11 billion US dollars in 2024, the total return on shareholders' cash will reach 114%. The dividend rate corresponding to the current stock price is 15.8%, and the high dividend advantage is remarkable.

7. Investment advice: HSBC Holdings' revenue and performance for the third quarter continued to exceed expectations, keeping the performance guidelines unchanged. Scale growth has shown a gradual recovery trend, and fluctuations in interest spreads are mainly affected by the one-time redemption of a payable bond. Asset quality is basically stable. Real estate exposures in mainland China and Hong Kong are gradually being cleared. The future will have little impact on credit costs. Recent organizational structure adjustments are also conducive to cost pressure reduction. Under the trend of gradual recovery in global trade and globalization of wealth allocation, the two core businesses of transaction banking and wealth management are still growing very strongly, exceeding expectations. Looking forward to the future, as the interest rate cut cycle begins, global economic vitality will improve, and credit demand, trade scale, and wealth management demand will improve. HSBC continues to contribute to the growth of rapid growth in trading banking and wealth management businesses through expansion, stabilizing interest spreads, and reducing costs. The performance is resilient during the interest rate cut cycle, and the ROTE level of around 15% is expected to continue to be maintained. Supported by stable profitability, the significant high dividend advantage is sustainable, and the allocation value is outstanding.

In the long run, the 3% terminal policy interest rate means sufficient loan pricing and investment income space, strong credit demand and strong corporate operating vitality, and a better level of asset quality. As a high-quality global bank, HSBC will be in a relatively ideal business environment. As the process of global industrial transfer progresses gradually, benefiting from the restructuring of the global industrial chain and the new trend of Chinese companies going overseas, the continuous increase in the scale of trade and investment can effectively hedge against interest rate fluctuations. Furthermore, the contribution of the retail wealth business and financial market business continues to increase. It is expected that HSBC Holdings will smoothly cross the European and American interest rate cut cycle that has already begun, effectively break free from long-term restrictions on the types of interest rate cycles, and maintain a good trend in terms of revenue growth and ROTE. Revenue growth in 2024-26 is expected to be 0.4%, 1.2%, and 1.6%, respectively, and profit growth rates of 5.0%, 1.9%, and 0.4%, respectively. ROTE is expected to remain around 15% in 2024-26. Supported by strong performance, the dividend level is stable and sustainable. The current valuation is 1.07 times 24-year P/TB (1.01 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.