HSBC says worst over for China real estate as Q3 profit disappoints

By Selena Li and Lawrence White

HONG KONG/LONDON (Reuters) -The worst may be over for China’s shaky commercial real estate market, HSBC said on Monday, as a further $500 million charge from the sector helped drag third quarter profits at Europe’s biggest bank below market forecasts.

While HSBC announced a new $3 billion share buyback and said profits for July-September more than doubled amid higher interest rates, its shares reacted with a shrug as investors took in the China impairment and increased cost forecasts.

“I do think the major correction (in China’s property market) is over and it’s now a case of a progressive work over an extended period of time,” HSBC Chief Executive Noel Quinn told reporters.

Fears about the debt-laden sector have weighed on foreign banks that lend to developers in China, especially after rival Standard Chartered (OTC:) reported an unexpected plunge in profit due to a nearly $1 billion hit from real estate and banking.

All eyes are on China’s embattled property giant Evergrande Group which has more than $300 billion of liabilities after it defaulted on its offshore debt in late 2021.

Hong Kong’s High Court said on Monday the next hearing on Dec. 4 would be the last before a decision is made on liquidating the company.

HSBC finance chief Georges Elhedery said the bank still expected “a couple of quarters of difficulty as the sector adjusts,” but that the longer term outlook was more positive.

Commenting on HSBC’s exposure to China, Hargreaves Lansdown equity analyst Matt Britzman said: “There’s still a cloud of uncertainty hovering over the market, but investors will be happy to see no nasty surprises”.

The bank’s overall results show the hurdles it faces in delivering the consistent returns its investors expect amid high inflation and pressure on borrowers, even as it showers them with cash from dividends and buybacks.

HSBC said costs would increase by up to 5% this year excluding the acquisition of Silicon Valley Bank’s British unit, more than its previous goal of a 3% rise, as spending grows and it considers bigger bonuses for bankers in the fourth quarter.

The bank posted a pretax profit of $7.7 billion for the July to September quarter, versus $3.2 billion a year earlier, but the result trailed the $8.1 billion mean average estimate of brokers compiled by HSBC.

“Costs are likely to be the area of controversy”, said London-based Jefferies analyst Joe Dickerson, though he added the share buyback was $1 billion larger than his forecast.

The London-headquartered bank with a market value of $118.6 billion said it aimed to complete the share buyback by next February, lifting the total buybacks announced this year to $7 billion.

It also set the third interim dividend this year at 10 cents per share, bringing the total annual payout so far to 30 cents per share.

HSBC shares in London were broadly flat, underperforming a 0.7% gain in the benchmark .

Third-quarter revenues rose 2% in HSBC’s Global Banking and Markets division that houses its investment bank, a more robust performance than rival Barclays’ 6% drop, as HSBC’s large payments business benefited from higher interest rates.

The bank’s wealth business, which it is prioritising for growth, attracted $34 billion of net new invested assets in the quarter and revenues have grown 12% so far this year as rate hikes let it reap bigger margins on lending.