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A lion statue outside the HSBC headquarters building in Hong Kong. Photo: Bloomberg

HSBC, Standard Chartered kick-start third-quarter bank reporting with eyes on margins, loan losses amid interest rate hikes

  • Hong Kong’s biggest banks increased their prime rate for the first time in four years in September
  • Questions remain about how slowing growth, particularly in China, could affect bank bottom lines
In another pivotal week for markets, investors will look to the impending report cards from HSBC, Standard Chartered and their peers for direction. Is the banking industry profiting from wider interest margins, or are economic pressures on consumers and businesses translating into more bad loans?

HSBC, the largest of Hong Kong’s three currency-issuing banks, is expected to post a 55 per cent drop in pre-tax profit to US$2.54 billion in the third quarter from a year earlier, based on consensus analyst forecasts compiled by the London-based banking group. The prior year’s quarter included a release of US$659 million in reserves for bad loans.

Standard Chartered probably grew its pre-tax profit by 13 per cent to US$1.13 billion, according to a consensus compiled by the bank. It made US$996 million a year earlier, which was driven in part by gains in financial markets and trade and lower provisions for soured loans.
HSBC will report on Tuesday, followed by Standard Chartered on Wednesday and Bank of China (Hong Kong) on Friday.

Rising rates should help fatten net interest margins on loan products, but the potential upside could be partially defeated next year by higher loan losses amid an uncertain economic outlook, according to analysts at Citigroup.

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“HSBC and Standard Chartered might see some modest pickup in credit cost this quarter, the former driven by rising global recession risks and the latter affected by several sovereign downgrades” in emerging markets, Citi analyst Yafei Tian said.

HSBC’s shares have declined 15.5 per cent in Hong Kong since March 16 when the Federal Reserve began its policy lift-off, according to Bloomberg data. Standard Chartered’s stock was little changed over the same period, while the Hang Seng Index finance sub-index slumped 18 per cent.

Both UK-based lenders generate much of their revenue in Asia and count Hong Kong as their single-largest market. While China’s economic slowdown presents moderate risks to Asia-Pacific banks, those in Hong Kong are more directly exposed than their rivals elsewhere, Moody’s Investors Service warned last week.

“Banks that have seen faster growth in exposure to China, as well as those with higher exposure to private enterprises and smaller companies, are more at risk,” Moody’s credit officers Eugene Tarzimanov and Srikanth Vadlamani said in a research note on October 19.

HSBC chief executive Noel Quinn will deliver his third-quarter report card on October 25. Photo: AFP/HSBC
Moody’s is predicting China’s economic growth to slow to 3.5 per cent for all of 2022 and 4.8 per cent next year, after expanding 8.1 per cent last year. The International Monetary Fund downgraded its forecast to 3.2 per cent for 2022 and 4.4 per cent for next year. China’s GDP grew by 8.1 per cent in 2021.
China delayed the release of its third-quarter gross domestic product (GDP) during the 20th party congress last week hours after its top economic planning agency said that growth “rebounded significantly” in the third quarter.
“In China, the frequent lockdowns under its zero-Covid policy have taken a toll on the economy, especially in the second quarter of 2022,” IMF Economic Counsellor Pierre-Olivier Gourinchas said in its latest economic outlook. “Furthermore, the property sector, representing about one-fifth of economic activity in China, is rapidly weakening.”
The debt woes of China Evergrande Group and several other property developers have unnerved foreign investors in the past year, especially with the sector representing about one-fifth of economic activity in the mainland Chinese economy.
A worker in a protective suit sits behind a barrier at a sealed area following a Covid-19 outbreak, in Shanghai on October 11. Photo: Reuters

HSBC and Standard Chartered, both of which have made big bets on future growth in China, took a combined US$539 million hit in impairments for potential soured loans in their Chinese commercial real estate books in the first half. Both have previously backed the quality of their mainland property portfolios.

Since the Federal Reserve began its lift-off in March, global central banks have rapidly raised interest rates in an attempt to douse decades-high inflation stoked by surging energy prices after Russia invaded Ukraine in February.
Five of Hong Kong’s biggest banking groups, including HSBC and Standard Chartered, last month raised their prime rate for the first time in four years, a move that could fatten their net interest margins. Yet, questions abound whether major economies will slip into recession from this year.

UK consumers have been hit by high inflation, with consumer prices reaching a four-decade high of 10.1 per cent in September. Britain is HSBC’s second biggest market.

British Prime Minister Liz Truss announces her resignation, outside Number 10 Downing Street on October 20. Photo: Reuters
Prime Minister Liz Truss resigned on Thursday after just 45 days in office after a series of policy failures that roiled global financial markets. Newly-installed Chancellor of the Exchequer Jeremy Hunt said they would reverse most of her tax cuts, and reduce support to households with energy payments.
Investors will be eyeing statements on potential restructuring and bank reorganisation, as HSBC continues to fend off pressure from Ping An Insurance (Group) to spin off its Asian operations.

Top executives at the London-based lender have argued that its international network is its strength and drives much of its business in Asia, but also has been exploring whether there are ways to expand its profitability.

Earlier this month, HSBC confirmed it was exploring a potential sale of its Canadian business as part of a strategic review of those operations, having earlier reduced its presence in the US financial market.
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