HSBC saw coronavirus rip its first quarter profit in half today as it counted a huge $2.4bn jump in credit losses as a result of the pandemic.
The bank’s share price declined 1.7 per cent to 409.3p in early trading as it revealed profit before tax sank 48 per cent year on year to $3.21bn.
And its expected credit loss – provisions HSBC makes on expected bad loans – rose to $3bn as a result of coronavirus.
Profit before tax plunged 48 per cent to $3.21bn for the first three months of the year, HSBC said.
That compares to $6.21bn a year ago, falling below HSBC’s own average analyst forecast of $3.67bn.
Reported revenue dropped five per cent year on year between January and March.
And HSBC’s net interest margin, a measure of the income it generates on products like loans and mortgages, dropped five basis points from 2019 to 1.54 per cent.
Meanwhile, the bank saw its expected credit loss (ECL) rocket by $2.4bn to $3bn compared to this time last year. The coronavirus outbreak and weakened oil prices drove this spike, HSBC said.
As a result of coronavirus the bank has upped its ECL allowance from $9.2bn to $11.1bn.
Chief executive Noel Quinn said: “The economic impact of the Covid-19 pandemic on our customers has been the main driver of the change in our financial performance. The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax.”
Why it’s interesting
However, the Asian-centred bank is pushing on with plans to move capital away from underperforming divisions. It is also still aiming to remove costs and streamline management.
But in line with other banks, HSBC has paused redundancies in the middle of the outbreak to ensure bankers can find work when they do leave.
Today HSBC warned 2020 profit will fall “materially lower” than 2019 due to coronavirus.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said underlying numbers were “strong” despite the coronavirus impairments.
“The fact HSBC has put aside a sizeable lump for coronavirus related loan defaults isn’t exactly a surprise,” Hyett said. “We’re actually reasonably impressed at how performance has held up so far.
“Loan growth has offset pressure from lower interest rates. [And] increased volatility in financial markets can actually be good news for the investment bank.
“Meanwhile the bank’s capital base has been able to absorb the impairment and an increase in the risk profile of the bank’s loans without deteriorating significantly – albeit with the help of the suspension of 2019’s final dividend.”
Still, Hyett warned of “pain from lower interest rates as fixed loans expire. And lower economic activity is a threat to HSBC’s trade finance and commercial banking units/
“If conditions get worse from here provisions for bad loans will increase. Together with credit downgrades that will eat into capital reserves.”
Shore Capital analysts added that HSBC’s robust balance sheet means it can weather coronavirus “without the need for emergency equity issuance”.
HSBC has already suspended its dividend over coronavirus, in line with other banks. Today it confirmed it will review its dividend policy at or before the release of full year results.
What HSBC said
Quinn also said:
The market-specific support measures that we are offering our personal and business customers have had strong take-up. We remain responsive to their changing needs.
We are also working closely with governments around the world to channel fiscal support to the real economy quickly and efficiently.
I take the well-being of our people extremely seriously. We have therefore paused the vast majority of redundancies related to the transformation we announced in February to reduce the uncertainty they are facing at this difficult time.
We continue to press forward with the other areas of our transformation with the aim of delivering a stronger and leaner business that is better equipped to help our customers prosper in the recovery still to come.