HSBC shares suffered their biggest one-day drop in nearly four years, after the bank recorded an 80% fall in profits linked to a writedown in the value of its stake in a Chinese bank.
Pre-tax profits fell to $1bn (£793m) in the final three months of 2023, down from $5bn a year earlier. This was primarily due to a $3bn charge linked to HSBC’s 19% stake in the Bank of Communications (BoCom) in China, which it bought in 2004.
BoCom is China’s fifth largest lender and, like its peers, is exposed to the ripple effects of China’s property downturn, which recently resulted in the forced liquidation of developer Evergrande. Concerns are mounting over the country’s banking sector, with a rise in bad debts linked to the crash in property prices.
However, HSBC insisted that the charge on BoCom was linked to an “accounting process” that took into account “various macroeconomic data” rather than BoCom’s direct exposure to commercial real estate.
HSBC separately put aside $200m to cover potential losses linked to direct exposure to mainland China’s commercial real estate sector in the fourth quarter. That was despite the chief executive, Noel Quinn, having suggested last quarter that China had already experienced the worst of the crisis.
“I did say last quarter that I thought the market had bottomed. I still believe that,” Quinn told a press briefing on Wednesday morning. “I also said last quarter that it will take a few years for the market to work its way through the current challenges. So I didn’t say challenges were over.
“But I did believe the activity levels in the commercial real estate market, the valuations in the commercial real estate market in mainland China, had bottomed, and that what I saw was a progressive and gradual recovery in the market.”
The news sent HSBC shares down 8.4%, its biggest daily drop since the early days of the pandemic in April 2020, when lenders were forced to cancel their dividends by the UK regulator amid fears over a surge in defaults linked to Covid lockdowns.
The picture across the year was brighter, with a 78% rise in annual pre-tax profits, as HSBC benefited from rising interest rates in both the west and also Asia – where it makes the bulk of its earnings – allowing it to charge its customers more for loans and mortgages. HSBC’s profits were also flattered by its emergency rescue of Silicon Valley Bank UK during the mini banking crisis in March 2023.
Overall, profits rose to $30.3bn, up from $17.1bn a year earlier and marking a record high. However, that missed analyst estimates of $34bn.
The bank went on to nearly double Quinn’s pay packet to £10.6m , from £5.6m in 2022, thanks to a long-term bonus in HSBC shares worth more than £5m.
The bank also increased its overall bonus pool for staff by 12% to $3.8bn (£3bn).
The bank is preparing to pay shareholders another dividend worth 31 cents a share, taking its total payout for the year to 61 cents. It also is planning a share buyback that will hand up to $2bn to investors.
However, profits may have peaked, given the likely future easing of interest rates and further pain from China’s real estate market.
Richard Hunter, the head of markets at Interactive Investor, said: “The likely reduction of interest rates globally could remove a plank from a core growth area of late, while the rather messy performance in the fourth quarter could lead to some rather more negative momentum.
“Indeed, in the group’s own outlook, HSBC is forecasting slow growth for the first half of the year, followed by a gradual recovery, while inevitably the parlous state of the Chinese economy in general and the real estate sector in particular are ominous headwinds.”
• This article was amended on 21 February 2024. An earlier version said that HSBC’s bonus pool was $3.8m instead of $3.8bn.
