Rate hikes prop up profits at HSBC

Rising interest rates have had a significant impact on HSBC’s financial performance, leading to a substantial increase in profits for the banking giant and a plan to return billions of dollars to its shareholders.

In the third quarter of this year, HSBC reported that its profits more than doubled to $7.7 billion, up from the same period the previous year. However, this figure fell slightly below market forecasts. The bank attributed this surge in profits to the favourable effects of higher interest rates, which allowed it to charge more for lending to individuals and businesses.

The Bank of England is expected to announce its decision on interest rates, which are currently at 5.25%, later this week. Prior to this, the central bank had implemented 14 consecutive interest rate hikes, starting from a historic low of 0.1%.

This trend of raising interest rates is not limited to the UK; other central banks, including the US Federal Reserve, have also been increasing rates. HSBC acknowledged that the “higher interest rate environment” has contributed to its global growth.

The bank anticipates that its net interest income, the difference between what it earns from lending and what it pays to savers and depositors, will exceed $35 billion for the year. In the most recent quarterly results, net interest income rose from $8 billion to $9.2 billion year-on-year.

Banks have been facing pressure to pass on the benefits of higher interest rates to savers, with calls from figures like Chancellor Jeremy Hunt to expedite this process.

Alicia Garcia-Herrero, chief economist for the Asia Pacific region at investment bank Natixis, pointed out that banks had limited room for profit before interest rates started rising, as they had to make payments to depositors while earning relatively little from lending money. The current environment offers more favourable conditions for banks.

HSBC also announced its intention to return an additional $3 billion to its shareholders, bringing the total amount to be returned to investors this year to $7 billion. The bank will also pay dividends. While the bank’s profit significantly increased in the past three months, it slightly missed the analyst expectations of $8.1 billion.

The increase in HSBC’s operating expenses was attributed to factors such as performance-related pay, higher technology costs, and the impact of inflation.

Additionally, the UK government recently announced the removal of a cap on bankers’ bonuses, effective from October 31, almost a decade after it was introduced following the 2008 financial crisis. HSBC reduced its bonus pool by 4% to $3.4 billion for the previous financial year.

HSBC, headquartered in London, generates the majority of its income in Asia. The bank disclosed that it had incurred a $500 million hit related to China’s crisis-affected property market, primarily linked to Evergrande.

HSBC noted that it continues to closely monitor risks associated with its exposures in mainland China’s commercial real estate sector and that there is still a level of uncertainty in the economic outlook, especially in the UK.

Last week, HSBC’s Asia-focused rival, Standard Chartered, reported an unexpected decline in its third-quarter profit due to a nearly $1 billion combined impact from its exposure to China’s real estate and banking sectors.