HSBC, Europe's largest bank, recently reported a 26% slump in pretax profit for the first half of the year, highlighting significant challenges ahead for CEO Georges Elhedery. This decline is particularly concerning as the bank faces mounting losses in China, which has become a focal point for its growth strategy in recent years, especially as it has scaled back operations in Western markets.
Taking charge last year, CEO Elhedery has initiated a sweeping restructuring at HSBC. During an earnings conference call, he revealed that the bank is currently reviewing its retail banking operations in Australia, Indonesia, and Sri Lanka. Furthermore, HSBC plans to wind down its retail business in Bangladesh in the latter half of this year. Despite these developments, Elhedery assured stakeholders that the bank's corporate and institutional banking sectors remain unaffected.
In terms of financial performance, HSBC reported a profit of $15.8 billion for the first six months of this year, falling short of brokers' estimates of $16.5 billion. Consequently, shares of HSBC listed in London dropped by 4.5%, mirroring earlier losses in its Hong Kong shares. The bank also faced a significant hit of $2.1 billion from its stake in the state-run Bank of Communications, following a $3 billion impairment recorded in February 2024, amidst rising bad loans in China.
Despite these setbacks, CEO Elhedery downplayed the impairments on the bank's BoCom stake, indicating that they would not hinder HSBC's ability to pay dividends. He described these impairments as accounting-related and labeled them as paper losses, stating, “These do not impact the outlook we have on the Chinese economy.” The latest writedown included a $1.1 billion loss due to the dilution of HSBC's ownership stemming from the Chinese bank's fundraising efforts earlier this year.
China's property market, historically a significant growth driver for the world's second-largest economy, has been in a prolonged downturn. This decline has persisted despite numerous government interventions aimed at reviving weak consumer demand, which has resulted in considerable losses for domestic lenders. HSBC reported an increase in expected credit losses of $900 million compared to the same period last year, totaling $1.9 billion, partly due to its exposure to Hong Kong's troubled commercial real estate sector. Analysts from Citigroup have warned that a sluggish property market in Hong Kong could continue to negatively impact the asset quality of banks operating in the region.
Looking ahead, HSBC cautioned that the effects of U.S. President Donald Trump's trade tariffs could impede its profitability targets, particularly the goal of achieving a mid-teens return on tangible equity in coming years. The bank anticipates recognizing a loss of around $1.4 billion in the fourth quarter of this year as it finalizes the sale of a mortgage portfolio in France to insurer Rothesay and French lender CCF.
Notably, HSBC's corporate and institutional banking division, which has become the bank's largest revenue generator following a major reorganization, reported a pretax profit of $6.4 billion in the first half of the year, marking a 4% increase from the previous year. This segment was the only one among HSBC's four main divisions to experience a profit increase.
With a market value of $225 billion, HSBC announced a new share buyback program worth up to $3 billion, complementing an earlier $3 billion buyback initiative. The bank also declared an interim dividend of 10 cents per share, signaling a commitment to returning value to its shareholders even amidst challenging conditions.
HSBC's immediate challenge lies in finding a successor for Chairman Mark Tucker, who plans to step down after eight years at the helm. According to Morningstar senior analyst Michael Makdad, it is crucial for HSBC to ensure that shareholders in Asia remain aligned with CEO Elhedery's strategic focus on simplification and intensive cost-cutting, without radically overhauling the entire business model.
Reporting by Selena Li in Hong Kong and Lawrence White in London; Editing by Jamie Freed and Muralikumar Anantharaman.
