The worst may be over for China’s shaky commercial real estate market, HSBC (HSBA.L) said on Monday, as a further $500 million charge from the sector helped drag third-quarter profits at Europe’s biggest bank below market forecasts. HSBC also said it will raise its cost forecasts for the year.
China’s property market turmoil has sparked fears among foreign lenders, especially those that lend to developers in the sector, such as HSBC. A collapse in the sector would further hurt the already debt-laden Chinese economy, weighing on growth and investor confidence.
The biggest of Hong Kong’s three currency-issuing banks cited higher bad-debt provisions and charges for its hedging strategy in mainland China commercial real estate, as it missed analysts’ expectations. However, HSBC’s wealth business, which it prioritizes for growth, attracted $34 billion of net new investments in the quarter, and revenues have grown 12 percent so far this year as rate hikes let it reap higher margins on lending.
HSBC reported pre-tax profit of 7.7 billion euros ($8.7 billion) in the three months to September, more than double the previous period but still short of analysts’ estimates. The lender, which has more than $3 trillion in total assets and $1.6 trillion in customer deposits, is one of the world’s largest banks, and its operations span markets across Asia.
Its earnings were bolstered by more robust trading income, reflecting a resurgent commodities market, which in turn was driven by higher global interest rates. Its net interest margin — a measure of lending profitability — rose to 1.7% from 1.63% last year.
The bank said it expected costs to rise by up to 5% this year on a constant currency basis, exceeding its earlier goal of a 3% increase as it spends on operations and technology and considers a potential rise in performance-related pay for staff. It was the fourth time this year HSBC has raised its operating expenses.
As the bank cuts costs, it seeks to boost its return to shareholders through dividends and share buybacks. Its latest plan includes a further purchase of shares worth $3 billion.
Despite the weak outlook for China’s property market, Quinn said the bank believed it was well-positioned to benefit from a revival in the country’s economy and rising demand for housing. “We believe that the current downturn has run its course and that the fundamental recovery is beginning to take shape,” he said. “This should support our property and consumer businesses in the coming years.”