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  • Writer's pictureJoel Lewitt

HSBC Unveils $3 Billion Share Buyback Program as Rising Costs Dampen Profits

HSBC Launches $3 Billion Share Buyback Program, While Third-Quarter Profits Fall Short Due to Rising Costs

HSBC, the largest bank in Europe, revealed a new $3 billion share buyback program on Monday, alongside a more than twofold increase in third-quarter profits. However, the results were less than stellar as costs surged beyond initial projections due to factors like escalating wages and increased technology spending.

Despite returning cash to investors through dividends and buybacks, HSBC is grappling with the challenge of delivering the consistent returns expected by long-suffering shareholders. This predicament arises at a time when global interest rates are on the rise. HSBC announced that costs are set to increase by up to 5% this year, excluding the acquisition of Silicon Valley Bank's British unit, surpassing its earlier target of a 3% rise. This rise in expenses is partly due to increasing spending and the consideration of larger bonuses for bankers in the fourth quarter.

For the July to September quarter, the bank reported a pre-tax profit of $7.7 billion, a substantial improvement from the $3.2 billion from the previous year. However, this result fell short of the $8.1 billion mean average estimate compiled by HSBC brokers. While HSBC's profit disappointed expectations, the larger-than-expected $3 billion share buyback was seen as a positive move by analysts, with Jefferies analyst Joe Dickerson noting that "costs are likely to be the area of controversy."

HSBC, headquartered in London and boasting a market value of $118.6 billion, intends to complete the share buyback by February, bringing the total buybacks announced this year to $7 billion. The bank also declared its third interim dividend for the year, amounting to 10 cents per share, bringing the total annual payout to 30 cents per share.

HSBC shares in London saw a 1% increase in early trading on Monday, aligning with the benchmark FTSE 100 index. In contrast, the bank's Hong Kong-listed shares dropped 1.46%, underperforming the broader financial index.

Within the third-quarter results, the bank recorded a $500 million impairment related to mainland China's commercial real estate sector. However, HSBC's Chief Executive Noel Quinn expressed optimism that the worst might be over for the troubled sector, stating that it's now a matter of gradual recovery over an extended period.

CFO Georges Elhedery cautioned that a few challenging quarters are still expected as the sector adapts.

Meanwhile, HSBC's Asia-focused competitor, Standard Chartered, reported a surprising one-third decline in third-quarter profits last week, largely due to its significant exposure to China's real estate and banking sectors.

In the third quarter, HSBC's Global Banking and Markets division, which houses its investment bank, posted a 2% increase in revenues, demonstrating a stronger performance compared to rival Barclays, which experienced a 6% drop. HSBC benefited from its substantial payments business, which thrived in the wake of higher interest rates.

HSBC's wealth business, prioritized for growth, attracted $34 billion in net new invested assets during the quarter, and revenues have grown by 12% so far this year, thanks to rate hikes enabling higher margins on lending.

However, the bank's overall net interest margin of 1.70% was slightly compressed by 2 basis points compared to the previous quarter, as customers in Asia shifted their deposits to term products.

Foreign banks operating in China, including HSBC, are also invested in prominent local lenders, which have been impacted by the government's efforts to lower mortgage rates and stimulate borrowing. China's Bank of Communications reported a 2.98% drop in third-quarter net profit, with HSBC holding a significant stake in the bank's Hong Kong-listed shares.

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