HSBC shares slide as profits drop 29% due to China and Hong Kong impairments

HSBC Holdings PLC reported a 29% decline in second-quarter profit before tax to $6.3 billion, missing analyst expectations, primarily due to a $2.14 billion impairment charge on its Bank of Communications investment and increased expected credit losses from Hong Kong real estate exposure, leading to a 4% share price slide. Despite the headline profit drop, the bank announced a new $3 billion share buyback and maintained its $0.10 quarterly dividend. Analysts noted that underlying profits, excluding these notable items, exceeded forecasts driven by stronger non-interest income, and return on tangible equity (excluding notable items) remained robust at 18.2%, signaling underlying business strength despite one-off charges.

Analysis

HSBC's second-quarter results present a clear divergence between headline figures and underlying operational strength, leading to a mixed but ultimately cautious market reaction. The reported 29% year-on-year drop in pre-tax profit to $6.3 billion, which missed consensus estimates by approximately $660 million and triggered a 4% share price decline, was driven almost entirely by notable items. Specifically, a $2.14 billion impairment charge on its investment in China's Bank of Communications and a $900 million increase in expected credit losses from Hong Kong's real estate sector were the primary detractors. However, stripping out these charges reveals a more robust picture; analysts noted that underlying profits exceeded expectations, propelled by strong non-interest income. This underlying health is further evidenced by a return on tangible equity (excluding notable items) of 18.2%, significantly beating the 15.7% forecast, and a 2% beat on tangible net asset value per share. Management's confidence is underscored by the announcement of a new $3 billion share buyback and a stable $0.10 dividend. While the company reiterated its mid-teens RoTE guidance through FY27, it also raised its FY25 impairment ratio forecast to the upper end of its 30-40 basis points range, signaling that while the core business is performing well, heightened credit risks in its key Asian markets persist.

Key Decisions for Investors

• Investors should look beyond the headline profit miss to evaluate the strong underlying performance, where an 18.2% adjusted RoTE and robust non-interest income indicate core business resilience.
• The new $3 billion share buyback and maintained dividend signal strong management confidence in future cash flows, potentially providing valuation support following the share price drop.
• It is crucial to monitor for any further deterioration in the Chinese and Hong Kong property markets, as the revised guidance for the impairment ratio to the top of its range suggests near-term credit risks remain elevated.