For the past few years, HSBC was in contraction mode as it undertook a thorough exercise to de-risk its business model. This phase seems to be drawing to an end as the bank has announced a profit before tax of €20.9 million for the first half of 2019. This profit is a significant 30 per cent increase over the same period last year.
The set of results announced by HSBC CEO Andrew Beane contain some positive messages to shareholders. The bank will be paying 30 per cent of its profits as dividends as the income streams from retail and commercial banking as well as the insurance business continued to improve.
Beane significantly remarked that the bank improved its market share of new customers as well as home loans without increasing its risk appetite.
HSBC, like other systemically important banks, faces significant challenges in the years ahead. The Single Resolution Mechanism, which is one of the essential pillars of the Banking Union, will likely mean that HSBC will have to increase its capital to meet the minimum requirements.
This capital increase will dilute the earnings of shareholders but will undoubtedly make the bank safer for depositors as well as shareholders.
Another significant challenge that HSBC faces is that of cost management. The bank’s cost to income ratio, at almost 73 per cent, is marginally better than it was last year but is still high when compared to that of its competitors. Non-performing loans were reduced by €11.7 million in the first half of this year – a further confirmation of the success of the de-risking strategy of the bank.
There are various areas where HSBC can improve its income to boost its profits. The insurance business, for instance, contributed a profit before tax of €2.4 million, which is 39 per cent higher than the same period in 2018.
With the introduction of fiscal incentives for occupational pension schemes, the bank’s strong franchise should ensure further penetration in the pensions market that is typically dominated by life insurance companies.
When commenting on the local economic situation, the HSBC CEO made a thought-provoking comment.
He said: “While Malta’s economic performance and outlook remain positive, we are positioning the bank for the long-term economic cycle and remain cautious in growing exposure to higher risk sectors such as corporate real estate”.
This is a sensible strategy as banks’ primary objective is to protect the interest of depositors and shareholders and not to underwrite risks that may appear to promise short-term rewards but are considered as a threat to long-term economic sustainability.
HSBC has launched a quarter of a billion-euro lending fund to signal to the market that the bank has returned to a growth focus. This fund will most likely be managed in a prudent way to promote trade and economic activities that are viable in the long term.
On an intentional level, HSBC is going through a tough phase, trying to adapt to the global threats of restrictions on trade. The restructuring that every major bank has to go through from time to time is often painful but necessary.
One hopes that HSBC Bank Malta will continue to operate in growth mode to support those activities that promise to help the local economy grow sustainably.