HSBC turnaround on track as results beat market estimates

A third share buyback in a year by HSBC Holdings Plc underlined progress in the turnaround plan for Europe's biggest bank, as profit also grew by 5 per cent in the first half of 2017.

After posting a second quarter of revenue growth and with plans to return another $2 billion of cash to investors, departing boss Stuart Gulliver's six-year turnaround of HSBC would seem to be gathering momentum.

The news sent HSBC shares up three per cent to a four-year high of 764 pence each in London this morning, as the bank signalled confidence it can continue to improve revenues from growth in Asia.

Chief executive officer Gulliver and chairman Douglas Flint are both retiring, leaving a legacy of improving revenue and returning more capital to shareholders, having focused on trimming the bank's empire and shifting its focus eastwards.

The latest share buyback, of up to $2 billion, comes as HSBC uses excess capital to offset the dilutive effect of shares paid out as dividends. It completed a previously announced $1 billion buyback in April.

Adjusted revenue and pre-tax profit rose 4 per cent and 13 per cent respectively, beating analysts' estimates, as the bank continued to pump capital into better-returning markets in Asia and earnings at the investment bank surged. The latest buyback means the London-based bank has pledged to repurchase $5.5 billion of shares in the past year, and executives said they're prepared to do more.

 ''The key market focus will be on the improved revenue and capital formation trends,'' Goldman Sachs Group Inc analysts wrote in a note Monday. ''Investors will undoubtedly focus on what implications this could have for future capital returns.''

The results indicate Gulliver's revamp of HSBC is starting to bear fruit as the bank starts to grow again after five years of declining revenue. The chief executive officer has spent most of his tenure shrinking and imposing central control over HSBC's vast global network, exiting almost 100 businesses and 18 countries while enduring several costly misconduct scandals.

''You could argue there is a more focused, logical, cohesive set of businesses that remain and there is absolutely growth'' on show at HSBC now, Gulliver said on a call with analysts.

New chairman Mark Tucker, who will succeed Flint in October, is already considering internal and external candidates to replace Gulliver, with an emphasis placed on someone who can continue to galvanize growth at Europe's largest bank.

The buybacks and sustained dividends show HSBC further ahead in its turnaround compared with British-based rivals including Barclays and Standard Chartered, which have suspended payouts as they restructure.

"The return of capital comes from the fact that the business is very accretive, very profitable ... the dividend is 51 cents for the foreseeable future," HSBC finance director Iain Mackay told Reuters.

''We've got revenues heading in the right direction across all our major businesses and regions'' and are in a ''very strong capital position,'' Mackay said in a Bloomberg Television interview.

With most banks in Europe slashing or eliminating their dividends to fund major restructuring programmes, HSBC has been one of the few to consistently pay out since the financial crisis, distributing more than $20 billion since June 2015 alone. New capital regulations have also depressed shareholder payouts as banks stockpile cash to swell their loss-absorbing buffers.

HSBC said its common equity tier 1 ratio - a measure of financial strength - was 14.7 per cent at the end of June, the highest among major European banks.

The ratio is set to increase further as the bank repatriates about $8 billion stuck at its US subsidiary, following approval last year from the US Federal Reserve, potentially enabling further buybacks.

"I cannot tell you whether we'll do a further buyback this year, but we are using buybacks as a regular part of the toolkit to manage returns to shareholders," Gulliver said in the conference call.

HSBC's dividends totalled $10.1 billion in 2016, $10 billion in 2015 and $9.6 billion in 2014.

For the half-year through June, pretax profit rose to $10.2 billion from $9.7 billion in the same period a year earlier, a result that compared with the $9.5 billion average estimate drawn from analysts polled by the bank.

Gulliver said he could be at HSBC as late as December 2018 if an external candidate is appointed by incoming chairman Tucker. Former AIA Group chief executive Tucker, HSBC's first ever externally appointed chairman, is set to take up the role on 1 October.

Focus on China
The bank announced two years ago it would hire 4,000 staff and lend more in China's southern Pearl River Delta region, a plan that has since encountered some setbacks as China's growth slowed, showing both the risks and opportunities.

HSBC won approval last month in China to establish an investment banking joint venture with a state-backed fund, ending a 20-month wait, making it the first such venture in China to be majority-owned by a foreign bank.

The venture will allow HSBC to expand in the world's second-largest economy, and is central to its ambition to increase profits by allowing the bank to underwrite and trade corporate bonds in China's domestic market.

The venture will be opened in December and staffed at first by around 50 people, Gulliver told Reuters on Monday.