Higher interest rates to drive profits as HSBC, Standard Chartered prepare to report second-quarter results

Concerns remain about recovery of Chinese economy; provisions for commercial real-estate loans expected to be lower, analysts say
US Federal Reserve expected to raise rates again this week after June pause

Banking & finance

Chad Brayin London

Published: 2:00pm, 24 Jul 2023

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Investors will be keeping a close eye on interest income gains as rates continue to tick higher and any strains from a sluggish Chinese economic recovery as Hong Kong’s biggest banks, including HSBC and Standard Chartered, unveil their second-quarter report cards beginning this week.

Standard Chartered will be the first of the city’s three currency-issuing banks to update investors on its first-quarter performance on Friday, followed by HSBC on August 1 and Bank of China (Hong Kong) later next month.

Hang Seng Bank, which is 62.14 per cent owned by HSBC, also will report its half-year results on August 1, with results from Bank of East Asia (BEA), Hong Kong’s largest independent and family-run lender, expected in late August.

“We see upsides to consensus earnings on better net interest income given Hibor strength in May and June,” Citi analyst Michael Zhang said in a research note on Wednesday. “Domestic Hong Kong banks’ fee income year-on-year growth is likely to remain muted amid weak market sentiment. While more China commercial real estate-related provisions are likely, credit cost could improve.”

02:31

China’s youth unemployment rate hits new high as recovery falters

The one-month Hong Kong interbank offered rate, known as Hibor, hit its highest level since 2007 during June. Hibor represents the cost for banks to borrow from each other in Hong Kong dollars and is used as a reference for many mortgages in the city.

Analysts also are expecting Hong Kong’s biggest lenders to further raise their prime rates as the US Federal Reserve is expected to resume its interest rate increases this week following a pause in June, which could hit Hong Kong homeowners with higher borrowing costs and delay a recovery in the city’s real estate market.

Standard Chartered is expected to report a pre-tax profit of US$1.37 billion in the second quarter, a 4 per cent increase over its results in the prior-year period, according to consensus analyst forecasts compiled by the London-based banking group.

The lender reported a pre-tax profit of US$1.32 billion a year earlier, in a quarter that included credit impairments for potential soured loans in its Chinese commercial real estate portfolio and a sharp drop in its wealth management revenue amid uncertainty in the global economic outlook.

Brace for mortgage pain as HSBC, Hong Kong peers seen raising rates: survey

Standard Chartered and crosstown rival HSBC took a combined US$1.9 billion in reserves on their Chinese commercial real estate loan portfolios over the course 2022, but saw improvements in their loan portfolios in the first quarter of this year.

HSBC, the largest of Hong Kong’s three currency-issuing banks, is expected to report a 25 per cent jump in pre-tax profit to US$6.24 billion in the second quarter, based on the latest consensus analyst forecast compiled by the lender. The lender reported a net profit of US$5.49 billion in the prior year’s quarter.

One concern for Hong Kong lenders will be weaker-than-expected growth in China’s economy during the second quarter and rising youth unemployment as the world’s second biggest economy experiences an uneven post-pandemic recovery. The nation’s economy grew by 0.8 per cent from the first quarter.

On Thursday, BofA Securities became the latest big bank to cut its forecast for China’s gross domestic product (GDP) growth this year, saying it now expects the economy to grow at 5.1 per cent.

Standard Chartered CEO Bill Winters poses for a picture at the Standard Chartered Building in Central in November. Photo: Edmond So

“Such deceleration combined with the negative GDP deflator, elevated youth unemployment, and corporate profit contraction are the telltale signs of a negative output gap,” Helen Qiao, BofA’s China and Asia economist, said in a research note. “This implies that more policy support is warranted to boost aggregate demand to a level closer to the long-term potential, given sluggish external demand.”

However, policymakers may not believe an aggressive policy response is “urgently needed” given year-on-year growth appears to be acceptable to Beijing’s target of about 5 per cent, Qiao said.

At the same time, HSBC’s and Standard Chartered’s American counterparts had a mixed bag when they reported second-quarter results earlier this month.

Big consumer-facing lenders, such as JPMorgan Chase, Bank of America and Wells Fargo, benefited from higher interest rates and loan balances, particularly as Americans carried larger credit card balances and continued to spend despite efforts by the Federal Reserve to slow the economy.

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Investment banking and trading revenue was under pressure at big Wall Street banks, such as Goldman Sachs and Morgan Stanley, as corporate deal-making remained muted amid uncertainty about the global economy and market volatility from earlier in the year has subsided.

S&P Global Ratings said higher interest rates could be a “double-edged sword” for lenders, with global banks forecast to report a 15.7 per cent jump in credit losses to US$772 billion this year and a further 5.5 per cent increase expected next year.

“Higher interest rates have generally benefited banks’ net interest margins although the effect on bank profitability will be mixed,” S&P analysts Gavin Gunning, Emmanuel Volland and Alexandre Birry said in a research note on Thursday.

“The dual negative effect on bank borrowers from weaker economic growth and high interest rates in many jurisdictions will progressively contribute to higher credit losses.”

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