The HSBC headquarters in Hong Kong, on Aug. 4, 2020.TYRONE SIU/Reuters
HSBC Holdings on Wednesday reported a shock $3-billion charge on its stake in a Chinese bank amid mounting bad loans in the country, sending the British bank’s shares plunging and taking the shine off its record annual profit.
HSBC’s shares slid as much as 8 per cent in London, heading for their worst single-day drop since the COVID-19 pandemic erupted in March 2020.
HSBC’s $3-billion impairment on its stake in China’s Bank of Communications (BoCom) is the largest yet by an overseas lender, as the country’s real estate crisis deepens and its economic recovery stalls.
Chief Executive Noel Quinn told reporters the writedown had not been triggered by any conversations with regulators, but came as accounting rules triggered a review of the value HSBC assigned to its 19 per cent stake in BoCom.
The bank’s annual report released on Tuesday said that “recent macroeconomic, policy and industry-wide factors” resulted in a wider range of valuations for HSBC’s BoCom stake than had previously been the case.
BoCom’s forecast earnings growth was also lower than its recent actual growth, HSBC said.
That knocked the BoCom stake’s “Value in Use” – an accounting measure of current value – to $21-billion as of Dec. 31, 2023 from nearly $24-billion at the end of 2022.
The hit also came despite Quinn saying as recently as October he thought China’s real estate crisis had bottomed out.
Quinn said on Tuesday he was seeing a “progressive and gradual recovery” but that it would “take a few years for the market to work its way through the current challenges.”
The share price plunge came despite the bank announcing a new $2-billion buyback, an annual dividend of $0.61 per share and the intention to pay a special dividend of $0.21 per share once it completes the sale of its Canada business.
The negative market reaction despite the record profit and chunky payouts highlights the challenge Asia-focused HSBC faces in matching investors’ sky-high hopes, as it grapples with China’s weaker than expected economic recovery.
The bank’s 2023 pre-tax profit jumped 78 per cent to $30.3-billion, but still missed a consensus estimate of $34.1-billion due largely to the unexpected China writedown.
HSBC’s costs also grew 6 per cent in 2023, more than it had forecast, due to the impact of higher-than-expected bank levies in the U.S. and Britain. It also said costs would grow a further 5 per cent in 2024, as it grapples with inflation while investing in its businesses.
Europe’s biggest lender said it remained cautious about the global loan growth outlook in the first half of 2024 against slowing economic growth in many economies where inflation persisted.
The bank reported a 14.6 per cent return on tangible equity (ROTE), a key performance target, in 2023, which fell behind analysts’ forecasts for 17 per cent. It said it continued to target ROTE in the mid-teens for 2024.
HSBC’s wealth business was a bright spot for the bank, with revenues up 8 per cent to $7.5-billion, partly boosted by the acquisition of Citigroup’s wealth business in China last year.
The wealth unit – which HSBC has been trying to grow, particularly in Asia – also attracted net new invested assets of $84-billion, up from $80-billion in 2022.
HSBC said its bonus pool rose to $3.8-billion from $3.4-billion in 2022, reflecting improved performance, and it would also launch a new variable pay scheme for junior and middle management staff.
CEO Quinn saw his total pay double in 2023 to $10.6-million from $5.6-million the year before, as long-term incentives from his appointment in 2020 began to vest, boosting his variable pay.