HSBC curbs profit and payout ambitions, bets on Asia wealth

Citing the low interest rate environment and tough market conditions, HSBC ditched its goal of achieving a return on tangible equity of 10 to 12%, and said instead it will aim for 10% over the medium term.

The moves by Europe’s biggest bank underlined the tough outlook for the banking sector as low interest rates worldwide take their toll, even as a global markets rally boosted the prospects for the wealth management business.

The margin pressure and mounting losses in Europe have forced HSBC to redouble its focus on Asia which provided a dominant share of the bank’s profits in 2020.

“The big structural shift that’s gone on since we set out the plan last February has really been the shift in interest rates down toward zero in most markets that we do business in,” Ewen Stevenson, HSBC’s group chief financial officer, told Reuters.

“If interest rates were 100 basis points higher today across the board it would improve our returns by 3 percentage points.”

The bank said it would pay a dividend of $0.15 a share in cash, the first payout announced since October 2019, after the Bank of England blocked all big lenders from paying dividends or buying back shares in 2020 to conserve capital.

However, it said it would stop the previous practice of paying a quarterly dividend, and target a payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards, well below the level in recent years.

HSBC also said it will make hefty cuts to some of its back office functions such as technology and operations, without specifying the number of jobs affected. The lender cut 11,000 jobs in 2020 and had signalled it would make further reductions.

The announcement came as HSBC reported profit before tax of $8.78 billion for 2020, down 34% from a year earlier but just above the $8.33 billion average of analysts’ estimates compiled by the bank.

Investors were resigned to HSBC’s more modest ambitions and growth target. “It’s hard to have high ambitions in this climate, or at least dangerous to declare them if they exist,” said Hugh Young, managing director at Aberdeen Standard.