HSBC Holdings’ financial performance in the first quarter of 2010 was very good and well ahead of Q1 2009, substantially driven by lower loan impairment charges. Personal Financial Services and Commercial Banking accounted for most of this improvement, while Global Banking and Markets were also ahead, the bank said.
In the US, the seasonal credit experience was particularly favourable in the quarter, resulting in pre-tax profits for the first time since the financial crisis began in 2007.
In most respects, HSBC Holdings’ experience in the first quarter broadly matched expectations at the outset of the year. Deposit spreads remained constrained, reflecting the sustained low interest rate environment in most major markets and increasing competition for savings. Balance sheet management revenues remained strong against long-term averages but were notably lower than in the exceptional first quarter of 2009. While customer appetite remained subdued in many developed markets, demand for credit picked up in emerging markets and for cross-border trade.
However, credit quality improved faster than HSBC anticipated in US consumer finance, and more generally across the Group. As a result, loan impairment charges fell to the lowest quarterly level for more than two years, reducing in every customer group and in all regions except the Middle East.
While HSBC continued to manage down the US consumer finance run-off portfolios, it also took advantage of opportunities to grow other businesses elsewhere. HSBC expects the upturn in demand for credit in emerging markets to translate into revenue growth over time as Asian economies drive the global recovery and as emerging markets begin to play a greater role in world trade. Customer loan balances were higher than at the year-end and wealth and insurance revenues in Asia and Europe were ahead of Q1 2009.
Premier also continued to make an important contribution to revenues, supported by a growing customer base which increased to 3.6 million during the period. For the Group as a whole, revenues were lower than in Q1 2009 but were higher than in Q4 2009.
Operating expenses were broadly in line with both Q1 2009 and Q4 2009 as a result of tight cost control across the business and the Group continued to invest in the One HSBC programme in order to drive greater efficiency across the global network.
As a result of all of the above, underlying pre-tax profits were comfortably ahead of both Q1 2009 and Q4 2009. On a reported basis, pre-tax profits were lower than in the first quarter of 2009, largely due to the exceptional positive movements in fair value on own debt related to credit spreads in Q1 2009.
HSBC Group Chief Executive Michael Geoghegan said: “I am encouraged by our very good financial results in the first quarter and pleased to say that our performance since the end of the quarter has been satisfactory. Although we remain alert to the impact of strains being seen in Europe, the emerging market trends are developing well and it is good to be able to report a pre-tax profit in the US in the first quarter – the first quarterly profit since 2007. It is too soon to declare victory but the improvement in the quarter is testament to the actions of our management team since we identified the problems in the US consumer finance market.
“We are still in the middle of a period of record low interest rates with no immediate end in sight – not least in the US and the UK. As a deposit-led bank, this will likely continue to constrain income for the rest of this year and even beyond. But although this is painful now, HSBC’s funding strength means we are one of the world’s best positioned banks in the long-term, as rates eventually rise.
“We expect appetite for lending and wealth management products to continue growing in emerging markets. However, it will take time for credit demand to translate into meaningful revenues. Asia and Latin America should continue to pick up during the year. Recovery could take a little longer in some parts of the Middle East, although current oil price levels are supporting development. In developed markets, revenue growth will remain challenging in the near-term. This reinforces the importance of our emerging markets strategy and I believe there is no international bank better placed than HSBC to support these economies and their links with the developed world.
“Regulatory change is the other major challenge ahead. It is in everyone’s interest that we have a stronger regulatory framework, with more responsible banks and more effective regulation which doesn’t restrict real economic growth. We agree that aggregate levels of capital and liquidity in the financial system must be increased. But we are concerned that, if increased too quickly, these measures could constrain banks from lending to customers when they need it most. The risk is that this could drive a new credit crunch, and stall recovery. Whatever change is agreed must also be implemented internationally, and to the same timetable.
“From my new base in Hong Kong, the shift from West to East is clearer than ever. In developed markets, the risks of double-dip recession and stagnation haven’t gone away. In contrast, recovery in emerging markets looks secure. Output is accelerating, new business volumes are strengthening, and employment is rising. All of this should help keep the global economy moving in the right direction.”