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HSBC profits plunge on higher Covid bad debt charges

By Frank Prenesti

Date: Wednesday 02 Sep 2020

HSBC profits plunge on higher Covid bad debt charges

(Sharecast News) - HSBC interim profits plunged 65% as it increased provisions for bad debts by $3.8bn amid the coronavirus crisis and accelerated plans to cut 35,000 jobs.
The Asian-Anglo bank set aside the cash to cover potential loan losses in the three months to June, a massive rise from $555m a year ago and far more than the $2.7bn estimated in company-compiled analyst forecasts.

Full-year loan losses could be $8bn - $13bn, HSBC said, "given the deterioration in consensus economic forecasts and actual loss experience" during the second quarter.

Pre-tax profits fell to $4.3bn, compared to $12.4bn for the same period a year ago, on a 9% fall in revenue during to $26.7bn.

The bank's net interest margin, the difference between loans and savings rates, fell to 1.43%, including a fall in the second quarter to 1.33%.

Chief executive Noel Quinn said the first half performance was impacted by the Covid-19 pandemic, falling interest rates, increased geopolitical risk and heightened levels of market volatility.

"Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC's footprint. We will face any political challenges that arise with a focus on the long-term needs of our customers and the best interests of our investors," he said.

HSBC said it would accelerate turnaround plans in the wake of the pandemic. In February said it would axe 35,000 jobs as part of a major restructuring programme.

The bank's core capital ratio rose to 15% at the end of June, but it warned this figure would decline later in the year as falling credit ratings hit its risk-weighted asset ratio.

TOUGH ROAD AHEAD

Hargreaves Lansdown analyst Nicholas Hyett said the bank had made progress on cost control despite pausing redundancies during the peak of the crisis "with the transformation plan expected to pick up pace from here that should soften the blow to the income statement".

"Low interest rates are a headwind that's here to stay, and a shrinking investment bank makes that more of a challenge. We wouldn't be entirely surprised if that fed through into reduced ambitions on profitability and maybe even a rebased dividend."

AJ Bell investment director Russ Mould said HSBC shares had been trading at their lowest level in a decade due to its exposure to the growing tensions between China and the West.

"The company faces the unenviable high-wire act of performing in a way which doesn't attract the ire of politicians and regulators in the UK, US and Europe while also not alienating Beijing," he said.

Mould added that with more radical options than the major redundancy programme likely being considered "could a break-up of the group be on the cards?".

Richard Hunter, head of markets at interactive investor said : "The tense political situation in and around Hong Kong and the deteriorating relations between the US and China place additional burdens on the bank's operations in the area, despite a tentative economic recovery in the region."

"From an investment perspective, the ongoing lack of a dividend removes another reason to consider the stock, while the outcome and details of the UK's exit from the EU remains to be decided."

"The shares have fallen 48% over the last year, as compared to a drop of 20% for the wider FTSE100, and including a decline of 38% in the last six months alone. The stock is currently out of favour as an investment destination, and the market consensus of the shares as a sell is unfortunately likely to remain in place for the time being."

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