HSBC share price down despite record-breaking 2023 profits

The HSBC share price underwhelmed after the bank released its results for its latest financial year. Our writer looks at the reasons why.

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The HSBC (LSE:HSBA) share price opened 5% lower today (21 February) after the bank released its results for the 12 months ended 31 December 2023 (FY23).

In its 159-year history, the FTSE 100‘s largest bank has never been more profitable.

Yet early indications are that investors are disappointed with the numbers.

A record-breaking year

Personally, I think it’s performed well. Compared to 2022, net operating income increased by 30%, to $66bn.

Profit before tax soared by $13.3bn, to $30.3bn. And its common equity tier 1 ratio (a measure of solvency) was 14.8% (FY22: 14.2%).

If that wasn’t enough, earnings per share (EPS) increased to $1.15 (FY22: $0.72).

But the results weren’t as good as forecast. The company-compiled summary of analysts’ predictions shows they were expecting EPS of $1.32.

They were also forecasting net operating income to be $600m higher and profit before tax to be $3.7bn better.

Measure ($m)202320222021202020192018
Net operating income66,05850,62049,55250,42956,09853,780
Expected credit losses(3,447)(3,584)928(8,817)(2,756)(1,767)
Other costs(35,070)(32,701)(34,620)(34,432)(42,349)(34,659)
Associates and joint ventures2,8072,7233,0461,5972,3542,536
Profit before tax30,34817,05818,9068,77713,34719,890
Tax(5,789)(809)(4,213)(2,678)(4,639)(4,865)
Profit for the year24,55916,24914,6936,0998,70815,025
Source: company reports

A balancing act

In my view, the results show that the bank has successfully managed to walk the tightrope of rising interest rates.

Central banks across the world have been raising rates to combat post-pandemic inflation. This is generally good news for banks and explains why HSBC’s income has increased so much.

It’s also the principal reason behind the increase in its net interest margin (NIM) of 24 basis points, to 1.66%. This is the difference between the rate charged on loans and that paid on deposits, expressed as a percentage of interest-earning assets.

However, higher borrowing costs also increases the possibility of customers defaulting on their loans.

HSBC is heavily exposed to the troubled Chinese property sector which, according to Swiss Re, now has debts of $8.9trn. Not surprisingly, it had to increase its estimate of loan defaults by a further $3.5bn, during 2023.

However, the increase in earnings demonstrates that the bank was a net beneficiary from the higher interest rate environment. But analysts were expecting a NIM of 1.69%.

Returns to shareholders

The results announcement contained good news for income investors.

Its full-year dividend will be $0.61 a share (FY22: $0.32). The bank also re-confirmed its commitment to a special payout of $0.21 a share, once the sale of its Canadian business is completed.

Final thoughts

As a shareholder, I find it disappointing that the market has reacted badly to a good set of results.

Irrespective of what analysts were expecting, I think the bank had a great 2023.

I find it puzzling that results are often judged against the expectations of a few individuals (that could be totally unrealistic) rather than the financial performance of previous years.

I’m particularly encouraged by the firm’s outlook.

For FY24, the directors are expecting net interest income of “at least” $41bn. This is 14% higher than for FY23.

With this outlook, a strong balance sheet, healthy dividend, and despite the risks, I see no reason to sell my shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Beard has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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