HSBC's Asia push bearing fruit for Gulliver before hand-off

[LONDON] HSBC Holdings Plc's $100 billion bet on Asia is bearing fruit, driving its third consecutive increase in quarterly revenue just months before Chief Executive Officer Stuart Gulliver hands the reins to John Flint.

Asia posted the biggest revenue gain out of the bank's five regions, helping it report higher-than-expected third-quarter adjusted revenue of US$13 billion. During the period, HSBC added US$1.1 billion of loans in Guangdong, the southern Chinese province where the lender has targeted expansion, it said in a statement.

"What we saw was good: continued revenue growth coming through the Asia and UK businesses, the vast majority of our markets saw balance sheet and revenue growth," Finance Director Iain Mackay said in an interview. The bank paid out US$300 million extra in performance-related pay because the strategy is "progressing well and ahead of our expectations," he said.

In February, 28-year company veteran Flint will inherit a bank in expansion mode after years of belt-tightening. Mr Gulliver spent much of his tenure shrinking and imposing central control over HSBC's sprawling global network, exiting almost 100 businesses and 18 countries while dealing with several costly misconduct scandals.

In June 2015, HSBC said it would redeploy billions of dollars of assets to Asia, betting on higher returns as China's economy expanded at a faster pace than Europe or the US. Just as the bank was putting an increased emphasis on China, the stock market imploded, but Mr Gulliver stuck to his guns, saying the meltdown didn't alter the country's strong fundamentals.

"Our pivot to Asia is driving higher returns and lending growth, particularly in Hong Kong and the Pearl River Delta," Mr Gulliver said in Monday's statement. More broadly, "growth in loans and advances translated into higher adjusted revenue in all three main global businesses," he said.

The adjusted revenue number reported by HSBC beat the average US$12.7 billion estimate of 15 analysts compiled by the firm. Adjusted pretax profit for the third quarter fell 1 per cent to US$5.44 billion, compared with a projection of US$5.41 billion.

The figures initially boosted the bank's Hong Kong shares, which ended the morning session up 1.1 per cent at HK$77.95(S$13.69). Those gains eased in the afternoon and the stock was little changed at HK$77.20 by 2.39 pm local time.

"Revenues were stronger than expected across the board," said Anil Agarwal, an analyst at Morgan Stanley. However, "expenses were higher than expected as the bank continues to invest in growth." Revenue rose slower than costs - a measure the bank calls jaws - which management has identified as a strategic issue to address. Adjusted jaws was a negative 4.9 per cent. The bank still expects jaws to be positive for the full year, Mr Mackay said in a telephone interview.

Part of the reason costs rose in the quarter was investment in technology, specifically it's mobile banking application, he said. In September, analysts at Autonomous Research criticized HSBC's app and called the lender a "laggard" in innovation.

At the securities unit, the bank's traders fared better in the third quarter than others in the City of London. Fixed-income and currency trading revenue dropped only 5 per cent, compared with the 34 plunge in the same business Barclays Plc reported last week. HSBC said it increased its market share in European rates and credit trading.

The lender's Hong Kong stock has gained 24 per cent this year after the bank announced plans to repurchase US$5.5 billion of stock, with executives hinting they're prepared to do more as the firm's capital buffer grows.

Mr Mackay has previously said as much as US$8 billion could be repatriated from its US operations and a portion of this would be allocated to buybacks. HSBC's North American unit passed a Federal Reserve stress test in June, clearing the way for more than US$3 billion of capital to be returned to shareholders, analysts said at the time.

Still, the new CEO has some work to do. Return on equity was below the bank's target of more than 10 per cent, coming in at 7.1 per cent, and the finance director said the bank wouldn't exceed the goal this year.

The firm's common equity Tier 1 ratio retreated to 14.6 per cent from 14.7 percent at the end of June, above its target range of 12 per cent to 13 per cent.

BLOOMBERG