There was an intriguing item in HSBC’s interim results highlights on August 1. The bank reported a total net expected credit losses (ECL) figure of $1.1 billion for the first half, made up of new charges and additional allowances “to reflect heightened economic uncertainty and inflation”; yet it also released most of its remaining Covid-19 reserves.
This raises an interesting question. At what point did credit stress stop being a pandemic issue and start being an unrelated macro issue?
One might argue that they are still one and the same. Credit stress today might not be directly the result of the pandemic – an airline that can’t fly because borders are closed, for example – but it is certainly a consequence of central bank and government largesse that was deployed in order to get through the pandemic.
We might say that we’ve replaced provisions for the pandemic, with provisions for the economic cure. It is perhaps a philosophical point.
“Net net, I think the consequences of the unwind of the previous Covid provisions and updating of new scenarios have basically cancelled each other out this quarter,” HSBC chief financial officer Ewen Stevenson told Euromoney on the earnings call. “What we are signalling is we do expect forward economic guidance to deteriorate in the second half, leading to higher ECLs in the second half relative to the first.
“We did think it was appropriate to effectively remove the Covid-related provisions,” he said. “We are facing a very different set of macro circumstances now, and we thought the previous models needed to be updated for the macro considerations we see ahead of us,” including inflation and war, “that were not previously being modelled.”
The bill
It is certainly true to say Russia’s invasion of Ukraine had nothing to do with the pandemic, but still there is a sense that the banking sector – which sailed through the pandemic largely unscathed in credit impairment terms, aided by generous government rescue packages and enormously accommodating central bank measures – is finally going to see the bill it had almost got away without paying.
We’ve noted before how the state, in many countries around the world, rescued potentially troubled creditors before their actual credit ever came under stress in banks’ books. From Brazil to Belgium to Bangladesh, banks provisioned conservatively for the impact of the pandemic, and for the most part, gave it all back unused less than two years later.
Having done so, they might suddenly need it, and are provisioning again for the pandemic’s true credit cost: an inability for companies to survive in the inflationary or recessionary (or, worst case, both) environment that was the inevitable consequence of getting past Covid.
That being said, the HSBC numbers remind us that not everything is about global shocks. The single biggest credit problem in the HSBC books is Chinese commercial real estate, a sector whose fortunes certainly haven’t been helped by lockdown but are ultimately bearing the consequences of years of questionably aggressive funding models and the blunt intervention of the regulator.
Quinn has been keen to try to frame this as purely a commercial matter stemming from a shareholder disappointed with long-term returns … But is it really purely a commercial matter?
Stevenson on Monday called it “the one portfolio globally we would call out at the moment that we are paying attention to,” in particular a $12 billion offshore portfolio, of which around one third is impaired or sub-standard under HSBC’s definitions.
“We have about a billion dollars of provisions set up against that… I think we do expect we will have to take more ECL exposures against that in the second half,” Stevenson says.
HSBC’s results, and the questions and commentary around them, focused chiefly on another Chinese issue: 9.2% shareholder Ping An’s campaign, conducted largely behind the scenes, to get HSBC to spin off its Asia business with a Hong Kong listing.
HSBC used the interim results to argue that any such spin-off, carefully referred to as “alternative structural options”, would have negative consequences for shareholders and would not be pursued.
Chief executive Noel Quinn has been keen to try to frame this as purely a commercial matter stemming from a shareholder disappointed with long-term returns.
“We believe discussions between ourselves and Ping An have been purely around commercial issues,” he said on Monday. “We do not see this as an issue of politics, it’s more an issue of commercial matters.”
He reiterated that “our current strategy is the fastest way to get to higher returns and dividends we all want to see.”
A hard place
But is it really purely a commercial matter? We have written before about the rock-and-a-hard-place location HSBC finds itself in as it seeks to balance its relationships with Hong Kong, China, the UK and the world, at both a political and a client level. Whether this is Ping An’s own view as a private-sector entity or reflects that of the Chinese Communist Party, part of the commercial logic of its position must by definition be political: the idea that geopolitical tensions between East and West are so bad that HSBC remaining a unified whole is untenable.
Quinn and Stevenson were speaking from Hong Kong for the first time in two and a half years, and will meet shareholders including Ping An this week. The timing is good. Lost in the geopolitics (not for the first time, nor presumably the last) was a really good result from HSBC: second-quarter pre-tax profit of $5 billion, way ahead of estimates, and a pledge to restore dividends to pre-pandemic levels.
“The most important thing tomorrow is that we’re able to meet with our shareholders in Hong Kong,” said Quinn. “We’ve been unable to do that for the past two and a half years.”
He knows that nothing will speak louder to those shareholders than success, or a viable promise of it.
“We recognize and understand their [Ping An’s] frustration with the performance of the bank in the last 10 years, and we are determined to improve the performance of the bank,” he said.
