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Quinntessential problem

25 Oct 2021 By Liam Proud

For investors trying to assess HSBC Chief Executive Noel Quinn’s turnaround strategy, Monday’s third-quarter results contained a blizzard of conflicting detail. Yet on the most important marker, a 10% return on tangible equity (ROTE) target for 2024, he’s still miles off.

Admittedly, the $123 billion bank has churned out a respectable 9.1% ROTE this year. That was helped by Quinn’s reappraisal of the likelihood of loan defaults. Over the first nine months of 2020 he squirreled away $7.6 billion to guard against pandemic-era bad debt. This year he’s shrunk the buffer by $1.4 billion in reaction to a growing global economy, flattering the bottom line.

Quinn is also handing $2 billion to investors through share buybacks. There could be more in store since he has about $13.6 billion of excess common equity Tier 1 capital over the midpoint of his target range. Regulatory changes, the announced buyback, losses on the sale of HSBC France and other well-flagged hits will eat up most of that. But even then, there is about $1 billion of spare capital before factoring in future earnings, according to Breakingviews calculations.

None of that should distract shareholders from the central problem: HSBC’s medium-term ROTE goal looks remote. Assume tangible book value grows as analysts expect, hitting an average value of $170 billion during 2024. Quinn would then require $17 billion of earnings to hit a 10% return. If bad debt goes back to 2019’s pre-pandemic level, and costs stay flat at Quinn’s $32 billion target, the required revenue by 2024 would be almost $63 billion. Analysts are only pencilling in $50 billion for 2021, meaning he has to find $13 billion of extra income over the next three years, equivalent to 8% compound annual growth.

Rate rises would help. But it’s unwise to base a business plan on tighter monetary policy, which is outside of Quinn’s control. The heavy lifting will therefore have to come from Asia, HSBC’s main focus and most profitable region. A slowing Chinese economy might make that tricky, and rivals are also vying to bank the same wealthy Indians, Singaporeans and Chinese that HSBC is targeting. The required 8% growth rate is significantly above the 5.2% rate of GDP growth that the International Monetary Fund expects for Asia between 2022 and 2024. That means Quinn’s revival of the bank rests on some questionable assumptions.


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