It has been a long, hard slog for Douglas Flint and Stuart Gulliver since they took over as chairman and chief executive of HSBC respectively at the end of 2010.
Yet their efforts now seem to be finally paying off, as shown by solid quarterly results published on Monday. This means Mark Tucker will find a bank on the up when he joins its board on September 1 — before taking over as chairman a month later.
Soon after Mr Flint and Mr Gulliver took charge, HSBC was reeling from the damage to its reputation caused by an almost $2bn fine for breaching US sanctions and laundering large amounts of money for Mexican drug gangs.
Since then, the duo have had to abandon a series of financial targets, been grilled by the UK parliament over the “Swiss leaks” tax-dodging scandal at its private bank and agonised over whether to move headquarters out of the UK in protest at rising taxes.
However, analysts say that with conditions turning in favour of big global banks — thanks to rising US interest rates, steady economic growth and a cooling of regulators’ appetite for new rules — HSBC looks like emerging as a winner.
“If Mark Tucker had arrived 18 months ago, it would have been pretty obvious that what was needed was a serious shake-up, even a break-up, of HSBC,” says James Chappell, analyst at Berenberg. “Now it is harder to see what changes he can introduce to the business. Shareholders seem happy with what they are delivering.”
The bank underlined its improving fortunes on Monday by announcing second-quarter profits of $3.87bn, outstripping analysts’ expectations with a year-on-year increase of 57 per cent that took its total profits for the first six months of this year to $7bn.
It also unveiled a $2bn share buyback plan, lifting the amount of total stock it has pledged to buy during the past year to $5.5bn. Like its big US rivals, analysts say HSBC is this year set to return 100 per cent of profits to investors via dividends and buybacks.
Mr Gulliver said he was “very happy” with the results, adding that the bank had benefited from “revenue growth in all three of our global businesses”. HSBC shares touched a four-year high in London, rising almost 2 per cent to 758p.
Analysts give the CEO much of the credit for the turnround. He has launched a series of restructurings. The latest was dubbed “pivot to Asia” and involved shedding poorly performing assets to shift capital to higher-return areas such as southern China.
“Mr Tucker is joining HSBC at a time when we believe most of the heavy lifting — relating to business simplification, cost reduction and capital improvement — is close to completion by the current leadership team,” said Ronit Ghose, analyst at Citigroup, in a recent note to clients entitled “HSBC’s lucky Mr Tucker”.
There are four reasons to be bullish about HSBC’s prospects: its capital strength; costs-cutting; loan growth; and rising interest rates.
The bank’s capital generation in the second quarter beat analysts’ expectations after its common equity tier one ratio — a vital measure of balance sheet strength — rose from 14.3 to 14.7 per cent. Analysts estimate that gives it $13bn of surplus capital to distribute to investors, on top of its already attractive dividend yield of 5-6 per cent.
Having initially struggled to achieve his early cost-cutting plans, Mr Gulliver on Monday said the bank was on track to hit his latest target to strip out $6bn of costs by the end of this year, having already achieved $4.7bn of savings by the end of June. The CEO has cut the bank’s staff numbers from 295,000 to 233,000 since taking over.
Loan growth recently returned to HSBC, which added $27bn to its loan book in the second quarter, a net increase of 3 per cent. It is growing its mortgage book in its core UK and Hong Kong markets as well as lending more to businesses and financial institutions through its commercial and investment banking operations.
Finally, the bank is seen as one of the big winners from rising US interest rates, for which it is well positioned with a large excess of deposits to loans. Its net interest margin — the difference between the interest it earns on loans and pays to depositors — was flat in the first half of the year at 1.64 per cent.
But Mr Gulliver said Hong Kong interest rates were lagging behind US rates and he expected them to catch up in the second half of the year, generating “another great, substantial lift” to margins in both its consumer and corporate lending operations.
The HSBC boss recently abandoned his target of achieving a 10 per cent return on equity this year. But after the bank made a first-half return on equity of 8.8 per cent, he said there was “a good chance” of double-digit returns next year.
Attention is now turning to Mr Tucker’s first big decision: who to pick to replace Mr Gulliver when he retires next year. The bank’s improving performance may make him more inclined to choose an internal candidate, such as John Flint, head of its retail banking and wealth management unit, or Iain Mackay, finance director.
The current chairman seemed to hint of this on Monday when he said: “What the board will do is to benchmark that slate of internal candidates against external candidates. That is common practice. But we have a very strong slate of internal candidates.”