May 4, 2017 / 10:18 AM / 3 months ago

HSBC posts strong Q1, scales back expected TLAC issuance

LONDON, May 4 (IFR) - HSBC expects to issue less loss-absorbing debt than it forecast this year and sees overall issuance at the low end of previous guidance, helped by new guidance from the UK regulator on what is required.

That could help save HSBC more than US$300m in annual interest payments, good news for Europe's biggest bank after it reported adjusted pretax profits of US$5.9bn for the first quarter, up 12% on the year. Profits in its investment bank jumped 35% to US$1.7bn.

HSBC had previously said it expected to issue US$60bn-$80bn of total loss-absorbing capacity (TLAC), which meet new rules requiring banks to hold debt that can absorb losses if they hit trouble. HSBC issued $31bn of the debt last year, and expected to issue about US$30bn this year and any remaining requirement in 2018.

The bank said in its results on Thursday that the Bank of England had provided further guidelines on the requirement, which is dubbed MREL in Europe.

"There's no question the guidance is helpful and it would indicate we're going to be at the lower end of the range we have indicated," Iain Mackay, finance director, told reporters on a conference call.

"We will be doing less this year, that's certainly what this guidance would indicate to us."

HSBC said it already met its 2019 MREL requirement, and would have longer to meet a 2022 target set by regulators.

The bank issued US$5.7bn of TLAC-eligible debt in the first quarter, so had US$37bn in issue at the end of March.

HSBC had previously said the interest costs for TLAC issuance could rise to US$900m this year from US$400m in 2016. Mackay said that was now likely to be US$500m-$600m.

STRONG RATES

HSBC's global banking and markets business reported revenues of US$3.89bn for the first quarter, up 14% on an underlying basis from a weak first quarter of 2016.

Rates revenues jumped 53% to US$648m and credit revenues more than doubled to US$327m. Equities revenues jumped 44% to US$334m. HSBC outpaced most rivals in those areas.

Its foreign exchange revenues dipped 10% to US$625m, however, and banking and advisory revenue rose 2% to US$894m, less than the growth reported by rivals.

HSBC said rates and credit captured "increased client flows" and FX revenues were hurt by reduced market volatility.

Chief executive Stuart Gulliver said GBM "had a great quarter".

HSBC's group adjusted profits also beat expectations, although statutory profits, including one-off items and adverse movements in the value of its own debt, fell 19% from a year ago to US$4.96bn.

The bank's common equity Tier 1 capital ratio strengthened to 14.3% at the end of March, up from 13.6% at the end of 2016, even after buying back US$1bn of shares in the quarter.

Analysts said that raises the prospect it will buy back more shares later this year due to its strong capital generation. It has bought back US$3.5bn in the last six months and Mackay said the bank would take a pause before deciding whether to restart.

"Capital strength suggests further buybacks could follow, although we understand management is prioritising investing in the business," said Gary Greenwood, analyst at Shore Capital.

Much could depend on HSBC's ability to repatriate about US$10bn of capital estimated to be stuck in its US subsidiary. The US Federal Reserve last year gave approval for its US arm to pay a dividend to the group.

Mackay said the process of repatriating US capital will take 3-5 years.

HSBC's London-listed shares were up 3.4% at 667p.

Gulliver said 2017 marks the final year of strategic actions set out in 2015 to cut costs, improve returns and simplify the business. He has tried to unwind many of the acquisitions of previous years, which created a costly and inefficient global empire.

But return on equity has been slow to turn, and came in at 8% in the first quarter, short of Gulliver's target of 10% or above. The bank does not expect to hit its 10% target this year, weighed down by heavy compliance costs and low interest rates. (Reporting by Steve Slater)

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