The HSBC Holdings (LSE: HSBA) share price opened positively on the release of first-quarter earnings Tuesday (29 April).
The bank saw profit before tax drop to $9.5bn in the period, from $12.7bn in the same quarter the previous year. But that still beat estimates, with the fall mainly due to Canadian and Argentinian disposals.
The $2bn share buyback announced with 2024 full-year results is now complete. And the board announced a new $3bn buyback, to be completed before the announcement of first-half results scheduled for 30 July.
Tariff effect
The news wasn’t all positive, as HSBC reported higher expected credit losses. The figure of $0.9bn is $0.2bn higher than for Q1 in 2024. The reason? “Heightened uncertainty and a deterioration in the forward economic outlook due to geopolitical tensions and higher trade tariffs.”
Considering the scale of HSBC’s operations in the Chinese economic sphere, it’s not surprising that it expects to take a hit. We’ve really no idea what will happen next in the US trade war against China. So that uncertainty is really the biggest obstacle for investors here.
The reported net interest margin is falling too. At 1.59%, it’s down 4 basis points from the same quarter last year. And that’s due to falling interest rates. Even with the current economic turmoil, rates are likely to be lowered further around the globe. It’s something else for investors to watch out for in the coming quarters.
Outlook
The board’s outlook paints an uncertain picture. It said: “Given current levels of uncertainty and market turmoil, we expect demand for lending to remain muted during 2025.“
But even with the growing threat from protectionist US trade policies, things still seem relatively upbeat. The statement suggested “mid-single digit percentage growth for year-on-year customer lending balances” in the medium to long term. And “double-digit percentage average annual growth in fee and other income in Wealth over the medium term.”
Tha bank has also set a “dividend payout ratio target basis of 50% for 2025.” And that’s one of the key attractions for me.
Cash generation
HSBC announced a dividend of $0.10 for the quarter. The rest of the year is hard to predict, but I see no reason yet to doubt the full-year forecast. It currently suggests a 6.1% dividend yield. And with all those surplus billions to return via buybacks, it looks like the cash should be there to cover it.
Buybacks should be good for future yields too. They reduce the number of shares in existence and boost per-share measures like earnings and dividends.
What next?
The main risk still remains the ongoing US-China trade war. Whatever the final outcome, it’s hard to see it not having a significant impact on the Chinese economy. In fact, it already has, with news of factories halting production to seek alternative customers.
But despite the possibly cloudy months ahead, the forecast price-to-earnings (P/E) ratio of 8.9 still looks too low to me. I think dividend investors with a global outlook could do well to consider buying for the long-term cash prospects.
