Shares in global bank HSBC (HSBA) lost 5.3% after its Q1 earnings undershot market expectations. As predicted in our look ahead, the miss was due to higher costs and provisions for the worsening global economic outlook.
Worsening outlook
HSBC’s Q1 pre-tax profit of $9.4 billion was below the consensus of $9.6 billion and Q1 2025’s $9.5 billion. The decrease reflected higher expected credit losses and other credit impairment charges together with a rise in operating expenses.
Provisions for expected credit losses were $1.3 billion against $400 million last year. The main item was a charge for $400 million of ‘fraud-related’ securitisation exposure in its UK investment bank.
The bank also adjusted its base case scenario for the global economy due to the Middle East conflict. As a result, it took an extra $300 million in provisions for bad loans across its various businesses.
Meanwhile, operating costs of $8.7 billion were $300 million higher than estimated and $600 million higher than Q1 2025. The impact reflected higher inflation, spending on technology and the phasing of executive performance-related pay rises.
Potential downside
For the full year, the bank raised its forecast for net interest income from at least $45 billion to around $46 billion. However, it also raised its average loan loss forecast from 0.4%, previously the top of its guidance range, to 0.45%.
The firm said it had run various stress tests to include higher oil prices and inflation and a ‘material’ slowdown in GDP. Under these scenarios, it projected a mid to high single digit percentage drop in pre-tax profit this year.
As we said in last week’s results preview, operating costs and provisions were likely to be the key areas to watch. HSBC has disappointed on both fronts and shareholders have expressed their concern by marking the stock down.
The $400 million increase in charges for a fraud-related secondary securitisation in the UK echoes Barclays’ (BARC) losses. The UK lender’s shares were sold off last month on a jump in bad loans in its investment banking unit.
Maybe the most eye-catching aspect of these results is the change in expected credit losses going forward. From a range of 0.3% to 0.4% of total loans, the bank now sees that figure reaching 0.45% this year. Combine that with a scenario where higher inflation and energy costs together with market disruption cause a drop in earnings.
It’s worth noting that around 10% of HSBC’s deposit base by volume and by value is in the Middle East. That is a fairly substantial deposit base, so the longer the conflict rumbles on the greater the risk of capital flight.
Read the press release here:
https://www.hsbc.com/investors
