Breakingviews: HSBC invites shy investors to turnaround party

Noel Quinn is giving up his modesty. On Tuesday, on the back of estimate-beating earnings for the second quarter of the year, HSBC’s boss declared his strategy is working and upped his targets for the bank. His next challenge is to convince shareholders that the recent improvements in performance by the $160 billion lender after a decade of disappointments are sustainable.

The turnaround Quinn launched shortly after taking charge of the London-headquartered bank in 2019 is gaining momentum. In the three months to the end of June, HSBC almost doubled its pre-tax profit to $8.8 billion compared with the same period last year. A strong performance in its Hong Kong insurance business following the reopening of the border with mainland China along with a mere 1% rise in costs helped it to generate an annualised 18.5% return on tangible ordinary shareholders’ equity for the half year, after stripping out some one-off gains. That’s only 80 basis points lower than the stellar result in the first quarter.

There’s plenty to celebrate. Much of HSBC’s pivot to Asia including an effort to move risk-weighted assets away from historically underperforming divisions like continental Europe and North America, is now all but complete. It expects the sale of both its French retail banking operations and its Canada business to close in 2024. That makes now a good time to set more ambitious goals.

For this year, Quinn is now targeting more than $35 billion of net interest income – the revenue it makes from loans and bonds after deducting money it pays to depositors and others – in line with its annualised performance from the first half. He’s catching up with market expectations, too, aiming for a return on tangible equity in the mid-teens and echoing Visible Alpha’s consensus numbers for 15% this year, and almost 14% next.

Crucially, Quinn and his newish finance chief, Georges Elhedery, can focus on improving the bank’s performance with fewer distractions. One big reason is HSBC’s pushy Chinese shareholder and 8% owner Ping An Insurance taking its discussions with the bank back behind closed doors after failing in May to muster support from other shareholders for a separation of the Asia business.

All shareholders, though, clearly still need some convincing to join HSBC’s turnaround party in earnest. Assuming interest rates remain at or near current rates and unemployment stays low, the bank’s shares ought to trade closer to 1.5 times its one-year forward tangible price to book value assuming a 10% cost of equity; instead they trade at par. A few more quarters of consistency could entice more investors to the dance floor.