Tuesday 27 October 2020 10:26 am

HSBC to overhaul business model as ultra-low interest rates hit profit

HSBC is planning a coronavirus-induced overhaul of its business model, seeking to shift its main source of income from interest rate to fee-based businesses.

Europe’s biggest lender will also accelerate a sweeping cost-cutting programme, despite reporting better-than-expected results for the third quarter.

Read more: HSBC ‘to cut 300 jobs’ in overhaul of UK commercial banking

In a potentially seismic shift for the banking industry, HSBC also suggested that it could start charging for current accounts in markets including the UK, where they are currently free. 

Third quarter profit beats expectations 

The bank posted a quarterly pre-tax profit of $3.1bn (£2.4bn) – a 36 per cent drop year-on-year. 

The figure is significantly higher than analyst forecasts compiled by the bank of $2.07bn, and chief executive Noel Quinn said the results were  “promising” given the ongoing global impact of Covid-19.

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Provisions for bad loans fell to $785m in the third quarter, down from $3.8bn in the previous three months. The bank said it expected losses from bad loans to be at the lower end of the $8bn to $13bn range it set out earlier this year.

“This latest guidance, which continues to be subject to a high degree of uncertainty due to Covid-19 and geopolitical tensions, assumes that the likelihood of further significant deterioration in the current economic outlook is low,” the lender said.

HSBC’s London shares rose as much as 6.86 per cent following the results.

HSBC may charge for accounts amid ultra-low interest rates

The newly-announced plans to overhaul its business model represent one of the largest shifts in long-term strategy to date from HSBC, which has long touted its ability to generate interest income from its more than $1.5 trillion in customer deposits.

However with interest rates across the globe at rock-bottom and some even turning negative, the bank has struggled to generate income from lending, warning today that net interest income would remain under pressure.

Chief executive Noel Quinn told reporters that HSBC needs to explore ways to increase revenue in “a low interest rate environment.” 

“Part of that is looking into how we price our assets that we lend, and the services that we offer,” he continued. 

Quinn said that while the lender was committed to offering its basic bank account in the UK without fees, it would look into introducing charges elsewhere “to make sure that we have a sustainable profitable business going forward”.

However experts warned that a move towards charging for more services could be a tough sell to consumers in some markets. 

“It will need to be done carefully to not damage the trust of the brand or get customers to switch, especially in countries where competitors offer the service for no charge,” said Sudeepto Mukherjee of consulting firm Publicis Sapient.

HSBC sees case for ‘conservative’ dividend

HSBC said it would consider paying a “conservative” dividend following its better-than-expected performance in the third quarter.

The bank cancelled its dividend for the first time in 74 years following pressure from the Bank of England for lenders to scrap payouts in the face of the disruption caused by Covid-19.

HSBC said it would announce a final decision on dividends in its 2020 full-year results in February, adding that a payout would depend on its forecasts for 2021 and consultations with regulators.

“We recognise how important dividends are to our shareholders and we will look again in early 2021 as to what the appropriate level of dividend might be,” chief executive Noel Quinn said.

AJ Bell investment director Russ Mould said that while the decision on dividends was in regulators’ hands for now, “the decision to mention a pay-out at all may suggest HSBC has an idea of which way the winds are blowing”.

“The company can also point to a very generous capital buffer when it comes to its ability to sustain dividend payments without overstretching itself,” Mould added. 

Bank to accelerate cost-cutting 

HSBC has been looking for opportunities to slash costs globally, and in June resumed plans to cut 35,000 jobs. The lender had put the planned job cuts on ice when the coronavirus pandemic first hit.  

Chief financial officer Ewan Stevenson said that HSBC had reduced its headcount by around 6,000, including contractors, in the first nine months of 2020. The bank is expecting a total reduction of 10,000 by the end of the year, he added. 

Read more: HSBC to set aside $1 trillion in green financing, targets net zero emissions by 2050

HSBC said it will accelerate plans to overhaul its US business, and will provide an update at its 2020 full-year results.

The lender has long struggled to compete with bigger local lenders in the US, and announced plans to slash its branch network in the country earlier this year.