HSBC on track to deliver ROTE target ahead of schedule as FY'21 profit rebounds

HSBC Holdings PLC expects to deliver a return on tangible equity of at least 10% in 2023, one year earlier than previously expected, on the back of a significantly improved interest rate outlook, as it reported a surge in full-year and fourth-quarter 2021 profits.

The U.K.-based lender's ROTE stood at 8.3% at the end of 2021. Analysts at UBS said in a research note that the bank's target compares with consensus expectations of 9.4%.

"If the current rates outlook is maintained, we're on track to deliver a return on tangible equity of at least 10% in 2023. That's a year earlier than our expectations of the third quarter," HSBC CFO Ewen Stevenson said in a Feb. 22 earnings call.

The group's interest-rate sensitive business lines continued to be adversely impacted by low rates in 2021, CEO Noel Quinn said. Net interest income fell to $26.49 billion from $27.58 billion a year earlier.

However, Quinn noted that net interest margin, which stood at 1.19% at the end of the fourth quarter, remained broadly stable during the year, and the bank expects net interest income to grow materially in 2022 and 2023.

"Coupled with tailwinds from higher interest rates, this provides strong revenue momentum for the future," Quinn said.

HSBC recorded a more than threefold increase in full-year 2021 profit attributable to ordinary shareholders of the parent company to $12.61 billion from the year-ago $3.90 billion. For the fourth quarter of 2021, attributable profit increased year over year to $1.79 billion from $562 million.

The group announced plans to launch a further share buyback of up to $1 billion, which is set to begin after the current $2 billion buyback program concludes in April, and declared a second interim dividend of 18 cents per share, bringing the total full-year 2021 dividend to 25 cents per share, up 67% year over year.

Loan losses and 2022 outlook

HSBC booked a net release of $928 million in expected credit losses, or ECL, in 2021, compared to a charge of $8.82 billion a year ago after the COVID-19 pandemic struck, reflecting an improvement in economic conditions and better-than-expected levels of credit performance.

An ECL charge of $450 million was booked in the fourth quarter, mainly driven by stage 2 charges reflecting recent developments in China's commercial real estate market, offset by releases in the U.K. and Europe.

The group said it retains roughly $600 million of pandemic-related allowances as of 2021-end and noted that ECL charges are anticipated to normalize toward 30 basis points of average loans in 2022. Mid-single-digit lending growth is expected over the course of 2022.

Mid-single-digit growth in risk-weighted assets is also projected in 2022. This RWA growth, together with capital returns, is expected to normalize the group's common equity Tier 1 ratio to within its 14% to 14.5% target operating range during 2022, HSBC said. Its CET1 ratio stood at 15.8% at 2021-end.

UBS analysts said good growth in income distribution is expected with HSBC's forecast earnings improvement, with the group's CET1 ratio beating market forecasts by 30 bps.

Quinn said he is pleased with HSBC's 2021 performance and "particularly pleased" with the group's return to revenue growth in the fourth quarter, which bodes well for 2022.