For banks, it’s clear that the boost from higher interest rates is almost spent. As a result, their control of costs will be watched even more closely. HSBC, for example, has raised its cost-growth guidance for this year to 5 per cent on a constant currency basis, up from the 3 per cent it expected in June. A surprise rise in operating expenses in the third quarter meant that its pre-tax profits missed market expectations, despite more than doubling to $7.7 billion as rate rises continued to feed through to higher income.
Yet this year’s marginal rise in costs shouldn’t be overplayed. Since Noel Quinn took over as HSBC’s boss, the group’s cost-efficiency ratio has improved to 49.3 per cent, from 67.7 per cent over the same period last year and 56.9 per cent during the third quarter of 2019. Of the 2 per cent rise in operating expenses anticipated this year, 1 per cent is set to come from higher variable pay, which could be a one-off. The rest will be due to investment in its technology — spending that could be flexed lower next year, too.
Banks are a play on the fortunes of the underlying economy in which they operate. Like the rest of its UK-listed peers, HSBC has traded at a persistent discount to its tangible book value. Slowing economic growth in mainland China and Hong Kong is one reason that investors remain cautious.
Linked with this is the precarious Chinese commercial property market. The lender booked another $500 million impairment related to the industry, taking the total to $800 million so far this year. It expects that to tick up to $1 billion for the year overall, previously considered a “downside” scenario.
Still, Quinn has called the bottom for Chinese commercial real estate and, anyway, more trouble here wouldn’t break HSBC. Its exposure to the market stands at $13.6 billion, or only 1.4 per cent of the total loan book. Impairments elsewhere declined and guidance this year for impairments has been held at 0.4 per cent of outstanding loans.
Nevertheless, HSBC is still valued at a relative premium to its London-listed peers. The shares are priced 17 per cent below the tangible book value forecast by analysts for the end of October next year, almost a quarter of that attached to Barclays and a third of that embedded in Standard Chartered, which focuses on emerging markets.
A higher degree of diversification is one reason, both geographically and by activity. China’s economic growth is slowing, but its gross domestic product is still about three times that of the UK. HSBC is modelling for a 4.6 per cent annual expansion in output for mainland China over the next two years, and about 3 per cent for Hong Kong.
A brighter outlook for the economic powerhouse would be the clearest avenue for closing the discount embedded in HSBC shares. An — unlikely — improvement in relations between China and the West would be another route.
The benefit of higher rates is already waning; customers shifting their money from current to term accounts squeezed the net interest margin. That key metric, calculated as the difference between what the bank charges on loans and pays on deposits, declined two basis points to 1.7 per cent from the previous quarter.
The common equity tier-one ratio stood at 14.9 per cent at the end of September, above a target range of 14 per cent to 14.5 per cent, justification for another $3 billion in share buybacks being declared. Analysts have forecast a dividend of 51.9p a share this year, which leaves the shares offering a potential yield of 7.9 per cent at the current price.
Investors should be well compensated for lingering macroeconomic risks.
Advice Buy
Why The shares offer a generous potential dividend and the chance of more special returns at a discount
Ascential
Persistent shape-shifting has not endeared Ascential to investors turned off by complexity. The sale of two of three of its businesses essentially has stripped the group back to organising only two events — the advertising industry’s Cannes Lion festival and Money 20/20, a conference aimed at the financial technology sector.
The implications for shareholders are mixed. The sale of its consumer research and digital commerce businesses will lead to £850 million being handed back to investors, most likely through special dividends. That equates to roughly 89 per cent of the group’s present market value. Combined proceeds of £1.2 billion are also more than some analysts had expected: last month Barclays had forecast a windfall of £832 million.
After deal costs, the remainder will be used to reduce net debt, which Ascential has said should amount to between one and two times its adjusted earnings before interest, taxes and other deductions for the standalone events business.
The process to break up the group started in April last year, a limbo that has not helped progress back towards a pre-pandemic valuation. The shares gained just over a quarter on the back of the spin-offs being confirmed, but still are 17 per cent below the 330p sum-of-the-parts valuation put on the events business by Barclays. It also leaves Ascential highly focused on those two events and slashes the proportion of revenue generated by subscription income. That more reliable revenue stream accounts for only a fifth of the total for the events business.
True, events has delivered solid revenue growth at a compound annual rate of 10 per cent since 2019. It is cash-light, which left capital expenditure equating to only 2 per cent of revenue in the first six months of the year. But there are signs that the wider economic downturn is being felt. Bookings for this month’s US edition of Money 20/20, one of three, were down 8 per cent on last year. Those for the upcoming Amsterdam event in June are flat. Sales of delegate passes for the next Cannes Lions were ahead.
A neater business structure might be easier for the market to digest, but the booking numbers are a sign of challenges that could emerge.
Advice Hold
Why Less diversity in revenue could cause pressure
