HSBC's third-quarter profit drops 14%, but beats expectations on higher revenue, interest income

HSBC exceeded third-quarter profit expectations with $7.3 billion in pre-tax profit, driven by a 15% year-on-year increase in net interest income and robust wealth management performance. Despite this, profit declined 14% due to a 24% rise in operating expenses, including $1.4 billion in legal provisions, notably $1.1 billion for Madoff-related claims which will trim its CET1 ratio by 15 basis points. The bank forecasts banking net interest income of at least $43 billion in 2025 and double-digit medium-term growth in wealth income, alongside its plan to privatize Hang Seng Bank, whose non-performing loans have risen amid property sector stress.

Analysis

HSBC reported a Q3 profit before tax of $7.3 billion, significantly exceeding consensus estimates of $5.98 billion and revenue of $17.8 billion against an estimated $17.05 billion. This outperformance was primarily driven by a 15% year-on-year increase in net interest income to $8.8 billion and a robust 30% year-on-year jump in wealth division income to $2.68 billion. The bank's management expressed confidence, forecasting banking NII of $43 billion or more in 2025 and double-digit annual growth in wealth fee income, citing favorable policy rate trajectories in the UK and Hong Kong.

Despite the strong top-line performance, Q3 profit before tax was down nearly 14% year-on-year due to a 24% rise in operating expenses, including $1.4 billion in legal provisions. A significant portion of this, $1.1 billion, is allocated for potential Madoff-related claims, which is expected to trim the bank's Common Equity Tier 1 (CET1) capital ratio by approximately 15 basis points. HSBC plans to appeal the Luxembourg court's decision regarding these claims.

Strategically, HSBC's plan to privatize Hang Seng Bank, valued at over HK$290 billion, reinforces its commitment to Hong Kong. However, Hang Seng Bank's non-performing loan ratio increased to 6.69% in H1 2025, reflecting continued stress in the property sector, which warrants close observation. HSBC shares in Hong Kong reacted positively to the news, rising 1.3%.

Key Decisions for Investors

• Investors should closely monitor the resolution of the Madoff-related legal provisions and their ultimate impact on HSBC's capital ratios, particularly the CET1 ratio.
• Assess the sustainability of the bank's net interest income growth and wealth management performance against evolving interest rate environments in key markets.
• Evaluate the strategic rationale and potential risks associated with the Hang Seng Bank privatization, especially given the rising non-performing loan ratio linked to the Hong Kong property sector.