HSBC (HSBA.L) pushed back on a proposal by top shareholder Ping An Insurance Group Co of China (601318.SS) to split the lender, a move Europe’s biggest bank said would be costly while posting profits that beat expectations and promising chunkier dividends.
The comments that London-based HSBC made on Monday were its most direct defense yet since Ping An’s plan to separate the bank’s Asian operations became public in April. It comes before HSBC’s shareholders’ meeting on Tuesday in Hong Kong, where the Chinese insurance company’s plan will be discussed.
And in a move that made investors happy, HSBC raised its goal for return on tangible equity, which is a key performance metric, from a minimum of 10 percent to at least 12 percent starting next year.
As reasons for its increased optimism, the bank pointed to falling costs, a 4 percent rise in adjusted revenues, and a growing net interest margin. This is because rate hikes by the central bank improve lending returns.
It also promised to go back to paying dividends every three months starting in early 2023.
Shares of HSBC went up almost 8% in London, making them trade at their highest level since the end of June.
Chief Executive Noel Quinn, who has run the bank for more than two years, told analysts, “We feel bad for Ping An and all our shareholders that our performance has not been where it needed to be for the last 10 years.”
Asia is where HSBC makes the most money. In the first half, Asia’s share of the bank’s profit went up from 64 percent a year ago to 69 percent.
Without directly referencing Ping An by name in its earnings presentation earlier on Monday, HSBC said a break-up would mean a potential long-term hit to the bank’s credit rating, tax bill, and operating costs, and bring immediate risks in executing any spinoff or merger.
“There would be a significant execution risk over a three to five year period when clients, employees, and shareholders would all be distracted,” Quinn said on the call, regarding the break-up proposal.
Some investors in Hong Kong, HSBC’s biggest market, have come out in support of Ping An’s proposal. They have been upset after the lender canceled its payout in 2020.
Quinn said HSBC would aim to restore its dividend to pre-COVID-19 levels as soon as possible.
Discussions with Ping An had been around purely commercial issues, the CEO said, in response to a question from a reporter about whether politics was influencing the Chinese investor’s call for the bank to break up.
Quinn told Reuters that the results of an outside review of HSBC’s strategy have been shared with the bank’s board, but they won’t be made public.
About 8.3 percent of HSBC’s equity is owned by Ping An, which has not confirmed or commented on the plan to split up the bank. A Ping An representative didn’t want to say anything about HSBC’s results and strategy.
Last month, Reuters reported, citing sources, that HSBC was planning to speed up its exit from non-core markets and put more money to work in Asia to fight back against Ping An’s plan to break it up.
Last week, Europe’s banks gave some good news about their profits.
Dual-listed Following in their footsteps, HSBC had a pre-tax profit of $9.2 billion for the six months ending June 30, down from $10.84 billion at the same time last year but higher than the average estimate of $8.15 billion made by the bank’s analysts.
Russ Mould, the director of investments at AJ Bell, said that investors are happy with HSBC’s second-quarter results because of things like rising interest rates, which make net interest margins better, cost control, and low expectations.
Instead of splitting up, HSBC said it would speed up the restructuring of its U.S. and European businesses and rely on its global network to make money.
Quinn said as a result of those moves, the bank’s risk-weighted asset reduction program had reached a cumulative total of $114 billion, and it was on track to reach at least $120 billion of savings by the end of this year.
The capital released will be utilized for investing in “areas of strength”, Quinn said, mainly in Asia.
Analysts at Citi said the new guidance implied earnings upside for HSBC. “The beat this quarter could result in high single-digit consolidated profit before tax upgrades,” they said in a report.
Citi analysts said that the new guidance meant that HSBC could make more money. In a report, they said, “The beat this quarter could lead to consolidated profit before taxes upgrades in the high single digits.”
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