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Hong Kong defect

2 November 2015 By Peter Thal Larsen

HSBC is cleaner and leaner but struggling to grow.

The global bank’s third-quarter earnings were free of the big fines and compensation claims that have been a recurring feature in recent years. That suggests hefty investment in compliance may be generating returns. HSBC forked out just $200 million in the latest three-month period to atone for bad behaviour, compared with $1.6 billion a year earlier. Other expenses are falling as executives take a newly-sharpened axe to the bank’s cost base. Asian bad debt provisions were down 30 percent despite worries over an economic slowdown in the region.

The problem now is growth. The turbulent summer in emerging markets hurt HSBC in two ways. Falling stock markets in Hong Kong dragged down a popular investment product whereby the bank shares a proportion of customers’ gains – or, in this case, losses. The bank’s measure of adjusted pre-tax profit in the former British colony was down 16 percent as a result. Meanwhile, volatile markets dented revenue in HSBC’s investment banking business. Though one quarter doesn’t make a trend, this is not what HSBC had in mind earlier this year when it promised to “capture growth opportunities in Asia.”

Chief Executive Stuart Gulliver is undeterred, however. HSBC’s campaign to sign up more retail and commercial bank customers in China’s Pearl River Delta, across the border from its historical Hong Kong base, is unaffected by stock market gyrations. The bank is also setting up a new securities joint venture in China – the first to be majority owned by a foreign lender. If approved, this would allow HSBC to tap into China’s booming bond market.

Investors remain sceptical. The shares have fallen 17 percent this year and trade on just 80 percent of HSBC’s latest reported book value. Improved compliance may have removed one form of volatility from the bank’s earnings. The challenge now is to show that what remains is capable of sustained expansion.

 

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