HSBC Holdings plc Promises Special Payouts For Shareholders But Is The Bank Bluffing?

It’s no secret that HSBC (LSE: HSBA) has struggled to find growth since the financial crisis. Indeed, the bank has embarked on several restructuring programmes to cut costs and improve efficiency since 2008, but since 2010, pre-tax profit has fallen by around 20%.

Management has cut thousands of jobs, sold more than 50 non-core businesses, and exited multiple non-core markets over the years, but despite these drastic measures growth has remained elusive. 

The bank’s latest attempt to try to jump-start growth involves a shift back to HSBC’s home market. Management is planning to relocate group assets away from underperforming markets such as Europe, the US and Turkey, and towards Asia — specifically China — where management believes higher returns are possible. 

Ten-fold increase 

HSBC is targeting a ten-fold increase in pre-tax profit from China’s Pearl River Delta region by 2020. And as part of this strategy the group was looking to increase its workforce in the Pearl River Delta area of southern China, which includes both the mega city Shenzen and Hong Kong, by 30% during the next few years. At the same time, the group is planning to cut 50,000 jobs from its global headcount. 

However, HSBC’s third-quarter earnings release shows that its shift to Asia has run into one major problem — HSBC is struggling to find suitable customers. 

Specifically, during the third quarter the bank cut $38bn from its $1.2tn of risk-weighted assets but could only redeploy $5bn. As chief executive Stuart Gulliver explained, the bank had been forced to slow its redeployment of assets because of the slowdown in Asian economic growth. In other words, HSBC’s relocation to Asia is now on hold.

But in an attempt to appease investors, HSBC’s management has indicated that the bank is looking to return any excess capital to investors it fails to redeploy. This could mean that special dividends or buybacks are on the cards. 

HSBC is looking to cut $290bn of risk-weighted assets in total. Of these, management is looking to redeploy $150bn of assets into Asian markets. The bank’s common equity tier one ratio — its financial cushion — is expected to rise above the minimum required level of 12% after the sale of the Brazilian business is completed. Anything over the critical 12% threshold could be considered to be excess capital, and returned to investors as a result. 

Not the first time 

This isn’t the first time HSBC has promised to return excess capital to investors. Management has made similar promises time and again for the past two-and-a-half years. HSBC has struggled to accumulate any surplus capital over this period. 

Still, HSBC’s regular dividend yield of 6.3% won’t leave investors feeling short-changed if the bank fails to accumulate and distribute any excess capital. The payout is covered one-and-a-half times by earnings per share. HSBC currently trades at a forward P/E of 9.7.