HSBC raised its dividend to the highest level in four years and said it might make a special payout next year, as it seeks to fend off break-up calls from its largest shareholder Ping An.
The UK- and Hong Kong-listed bank also said it would consider share buybacks sooner than expected. The moves came as it reported that fourth-quarter pre-tax profits almost doubled to $5.2bn on Tuesday, surpassing expectations, as higher global interest rates boosted revenues.
However, investors were disappointed by conservative forecasts for earnings and profitability, taken as an indication rates may have peaked. The bank’s shares initially fell 1.4 per cent in London before recovering to trade slightly up.
For the past 10 months, HSBC has been contending with pressure from Chinese insurer Ping An, which owns just over 8 per cent of the stock and is lobbying for a split of its Asian and western operations.
Its activist campaign was motivated by UK regulators banning HSBC from paying a dividend in the early days of the Covid-19 pandemic in 2020, which infuriated its Asia-based investors. It has since been restored, but at a much lower level.
Ping An also argues that HSBC’s global structure is no longer tenable in an era of heightened US-China tensions, which ratcheted up this month when the US shot down a suspected Chinese spy balloon and cancelled a key diplomatic meeting with President Xi Jinping.
The lender’s management has said a break-up would be complicated, costly and counterproductive.
“My primary focus is improving the performance of the bank,” chief executive Noel Quinn said in an interview, adding that he would meet Ping An in the next few weeks. “Alternative structural options . . . would have a material negative impact”.
Quinn pointed to a “radical shift” in the distribution of the bank’s profits since 2019, with the Middle East, Europe and the US contributing a greater proportion of earnings to complement its twin home markets of Hong Kong and the UK.
Nevertheless, Asia still made up 78 per cent of HSBC’s reported pre-tax profits in 2022. When adjusted to remove a loss taken for the sale of its French consumer unit, Asia’s contribution dropped to 60 per cent last year.
“The world is re-globalising . . . customers are demanding more international banking services, not less”, Quinn added. Keeping HSBC’s network together provides a “stronger capacity for growth and distribution to shareholders via dividends and buybacks, that is our key message”.
The bank set its dividend at 32 cents per share for 2022 — up from 25 cents in 2021 and the highest level since 2018 — and said a planned 21 cent special dividend next year would be a “priority use of the proceeds” from the sale of its Canadian business.
In November, it agreed to sell the division to Royal Bank of Canada for $10bn. HSBC said it expected to complete the sale of its Russian business — taking a $300mn loss — as well as of its consumer operations in Greece and France, this year, further trimming its sprawling network.
Blemishing the earnings were $1.4bn in credit losses and impairment charges for the final three months of the year, up from $500mn a year earlier.
This was largely due to another $600mn of provisions taken to cover potential losses in mainland China’s troubled commercial real estate sector, to which it has a $16.8bn exposure. That raised HSBC’s total China CRE reserves to $2bn and it warned another $1bn would be at risk if conditions worsen.
Net interest income rose 53 per cent in the fourth quarter to $9.6bn and reached $32.6bn for the full year, up from $26bn in 2021. HSBC is particularly sensitive to rates as one of the world’s largest deposit-taking institutions, with $3tn of total assets.
Its net interest margin — a key measure of lending profitability — rose to 1.74 per cent in the fourth quarter, up from 1.19 per cent a year earlier. However, management indicated that it did not expect this to improve significantly, echoing the outlook from UK peers NatWest and Barclays last week, which caused their stocks to fall sharply.
“While aspects of these numbers are positive, there is room for disappointment on 2023 guidance with no change in the net interest income outlook of more than $36bn, despite a strong fourth-quarter,” said Numis analyst Jonathan Pierce. “We expect the shares to be slightly lower today.”
The bank cut its bonus pool by almost 4 per cent to $3.4bn, helping contribute to a $1.3bn decline in its closely watched expenses to $33.3bn. Executives have been criticised in the past for missing cost-cutting targets.